Dollar soft as investors digest 'higher for longer' path

2023-08-28 09:59

By Ankur Banerjee SINGAPORE The dollar eased from a 12-week peak on Monday as traders weighed the U.S.

Dollar soft as investors digest 'higher for longer' path

By Ankur Banerjee

SINGAPORE The dollar eased from a 12-week peak on Monday as traders weighed the U.S. monetary path after the Fed Chair Jerome Powell left open the possibility of further interest rate increases, while the yen hovered close to its lowest in over nine months.

In an eagerly awaited speech at the annual Jackson Hole Economic Policy Symposium, Federal Reserve Chair Powell promised to move with care at upcoming meetings as he noted both progress made on easing price pressures as well as risks from the surprising strength of the U.S. economy.

"We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data," Powell said in a keynote address.

"It is the Fed's job to bring inflation down to our 2% goal, and we will do so."

The dollar index, which measures the U.S. currency against six rivals, eased 0.115% to 104.05, but not far from the 12 week high of 104.44 it touched on Friday. The index is up over 2% in August and set to snap a two month losing streak.

Markets anticipate an 80% chance of the Fed standing pat next month, the CME FedWatch tool showed, but the probability of a 25 basis point hike in November is now at 48% versus 33% a week earlier.

"It remains unlikely we get a hike from the Fed in September, said Chris Weston, head of research at Pepperstone. "But November is shaping up to be a 'live' event, where data points have the potential to throw interest rate expectations around."

"When many other G10 central banks are already priced for an extended pause, the Fed potentially going again in November is supporting the dollar," Weston said.

A series of strong U.S. economic data releases has helped ease worries of a recession but with inflation still above the Fed's target, some investors are worried that the U.S. central banks will keep interest rates at elevated levels for longer.

With the Fed highlighting the importance of the upcoming U.S. economic data, investor focus this week will firmly be on reports on payrolls, core inflation and consumer spending.

"If the data continues to show an ease in labour market tightness and price pressures, then the Fed is likely done with its tightening cycle," said Rodrigo Catril, senior currency strategist at National Australia Bank. "If the data doesn't play ball, then further tightening should be expected."

The yen weakened 0.03% to 146.45 per dollar, not far off the more than nine month low of 146.64 it touched on Friday as traders continue to watch out for any signs of intervention in the currency market from Japanese authorities.

The Bank of Japan will maintain its current ultra-easy policy as underlying inflation in Japan remains "a bit below" its target, the central bank's governor said on Saturday.

Meanwhile, the euro and the sterling came off two-month lows touched on Friday. The single currency was up 0.04% to $1.0804, while the pound was last at $1.2599, up 0.17% on the day.

The Australian dollar rose 0.55% to $0.644, while the New Zealand dollar gained 0.32% versus the greenback to $0.592.

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Currency bid prices at 0132 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar $1.0806 $1.0794 +0.12% +0.85% +1.0810 +1.0794

Dollar/Yen 146.4950 146.3250 +0.06% +11.57% +146.6100 +146.4200

Euro/Yen 158.30 158.07 +0.15% +12.83% +158.3500 +158.0900

Dollar/Swiss 0.8838 0.8847 -0.10% -4.42% +0.8867 +0.8838

Sterling/Dollar 1.2598 1.2577 +0.20% +4.20% +1.2604 +1.2584

Dollar/Canadian 1.3588 1.3601 -0.12% +0.26% +1.3600 +1.3585