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Dollar heads for weekly gain as rate cut optimism cools

Published 19/01/2024, 11:00 am
© Reuters. FILE PHOTO: U.S. one hundred dollar notes are seen in this picture illustration taken in Seoul February 7, 2011. REUTERS/Lee Jae-Won/File Photo
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By Harry Robertson and Tom Westbrook

LONDON/SINGAPORE (Reuters) -The dollar was on track to rise for the week on Friday, adding to solid gains so far this year, as the U.S. economy and pushback from central bankers has caused traders to dial down expectations of swift falls in interest rates.

The euro has fallen 0.6% this week, helping push the dollar index to a 0.9% gain, taking its increase this year to 1.9%.

Japan's yen has been the biggest loser: it is now down around 5% for the year so far as tepid economic data and a deadly earthquake have sapped confidence that the Bank of Japan is about to hike rates.

"The thumping message from U.S. activity data and central bankers is that markets are too aggressively priced for rate cuts in 2024," said Westpac's head of foreign exchange strategy Richard Franulovich.

"That, and a fresh bout of turbulence across China's property and financial markets has the dollar returning to form."

On Friday, the euro was up 0.1% at $1.0887, while the dollar index was little changed at 103.33.

The yen was also little changed at 148.02 to the dollar, having fallen after data showed Japan's core inflation rate slowed to 2.3% in the year to December. That was its lowest annual pace since June 2022, taking the pressure off policymakers to make swift moves.

"We're kind of stuck in this range here in euro," said Erik Nelson, macro strategist at Wells Fargo (NYSE:WFC). "As much as has happened, the euro has barely moved this year."

Nelson said investors were waiting for data on the Federal Reserve's preferred measure of inflation to be released on Friday next week.

Britain's pound was 0.17% lower at $1.2683. Data on Friday showed UK retail sales slumped by the most in three years in December.

Investors now expect 140 bps of interest rate cuts from the Fed this year, down from 165 bps a week earlier. They also see a roughly 54% chance the first cut comes in March, from 77% a week ago.

U.S. labour market data released on Thursday was strong, with weekly jobless claims dropping to their lowest level in nearly 1-1/2 years, adding to the pressure on market rate-cut wagers.

Fed official Christopher Waller said on Tuesday the U.S. economy's strength gives policymakers flexibility to move "carefully and slowly", which traders took as pushing back at pricing for a speedy fall in rates.

Two-year Treasury yields, which track short-term interest rate expectations, are up 22 basis points this week to 4.359%. [US/]

© Reuters. FILE PHOTO: U.S. one hundred dollar notes are seen in this picture illustration taken in Seoul February 7, 2011. REUTERS/Lee Jae-Won/File Photo

Bitcoin hit a five-week low at $40,484 overnight as traders have taken profits following the U.S. approval of spot bitcoin exchange-traded funds.

Australia's dollar, which tends to rise when investors are taking more risk in global markets, was up 0.4% at $0.6599, although it remains around 3.2% lower for the year.

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