Markets Evaluate US Interest Rates Impact on Dollar’s Strength

By Ankur Banerjee

SINGAPORE (Reuters) – Uncertainty surrounding U.S. interest rates kept the dollar in check on Friday, while the euro maintained its overnight gains on signs that the economic downturn in the euro zone might be easing.

With U.S. markets closed for Thanksgiving on Thursday and set for a shortened trading session on Friday, currency trading is expected to be narrow and volatile due to thin liquidity.

The dollar index, which gauges the U.S. currency against six major counterparts, edged down 0.029% to 103.73, hovering near its two-and-a-half month low of 103.17 reached earlier in the week.

The index is on track for its weakest monthly performance in a year, declining by 2.8% this month, amid growing expectations that the Federal Reserve will stop raising interest rates and could potentially start cutting them next year.

Market expectations of Fed rate cuts in 2024 have decreased, with futures now indicating a 26% likelihood of a rate cut at the March 2024 policy meeting, compared to 33% last week, according to CME Group’s FedWatch tool.

The euro held steady at $1.0904, rising 0.16% overnight following preliminary surveys suggesting a less severe recession in Germany than previously anticipated, offsetting a downbeat reading of French business activity.

In other news, Japan’s core consumer price growth slightly improved in October, reinforcing the belief among investors that persistent inflation might prompt the Bank of Japan (BOJ) to scale back monetary stimulus in the near future.

Economists at ING anticipate the BOJ to move away from its very accommodative stance next year, potentially scrapping the yield curve program in the first quarter of the year and considering its first rate hike in the second quarter of 2024 if wage growth continues to accelerate.

The Japanese yen strengthened 0.04% to 149.49 per dollar, rebounding from nearly hitting a 33-year low at the start of last week and gaining 1.5% for the month.

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Additionally, Japan’s factory activity declined for the sixth consecutive month in November, while modest growth in the service sector remained relatively unchanged, as indicated by a business survey on Friday, underscoring the economic fragility amid soft demand and inflation.

Sterling was last at $1.2539, up 0.05% on the day. The Australian dollar rose 0.14% to $0.657, while the kiwi increased 0.07% to $0.605.

Cash Treasuries resumed trading in Asia after Japan’s holiday on Thursday, with the yield on 10-year Treasury notes rising by 2.9 basis points to 4.445%.

The yield on the 30-year Treasury bond increased by 2.8 basis points to 4.576%.

(Reporting by Ankur Banerjee in Singapore; Editing by Jacqueline Wong)