US dollar weakens as data supports Fed rate cut view; yen spectacle continues
The US dollar weakened on Tuesday as a flurry of mixed economic data, some of it delayed and therefore out of date, reinforced expectations that the Federal Reserve will cut interest rates next month.
In morning trade in the US, the euro was up 0.5% against the dollar at $1.1577, while sterling strengthened 0.6% to $1.3184.
The dollar index, which measures its performance against other major currencies, fell 0.5% to 99.746 following the release of September retail sales and producer prices data, after initially holding onto its gains from last week when the index rose nearly 1%.
“Producer prices are stable and retail sales indicate a slight consumer slowdown, and this allows for a rate cut in December,” said Scott Helfstein, chief investment strategist, Global X, in emailed comments.
Data showed U.S. retail sales rose 0.2% in September, less than the 0.4% forecast by economists polled by Reuters and slowing from an unrevised 0.6% increase in August.
On the other hand, producer prices increased 0.3%, in line with expectations, after an unrevised 0.1% decline in August; however, at the core level, prices edged up 0.1%, below the consensus estimate of 0.2%.
Additionally, the latest US consumer confidence figure fell to 88.7 in November, from an upwardly revised 95.5 in October, further hurting dollar sentiment. Economists polled by Reuters had expected the index to fall slightly to 93.4 from the previous report of 94.6 in October.
“More concerns about what the future holds… hence delaying purchases of major items,” wrote Jennifer Lee, senior economist at BMO in emailed comments.
The economic data follows dovish comments from policymakers in recent days that helped strengthen expectations of an interest rate cut.
On Monday, Fed Governor Christopher Waller said the job market is weak enough to require another quarter-point rate cut in December, although action beyond that depends on a flood of data delayed by the federal government shutdown.
Waller’s comments followed similar remarks from New York Fed President John Williams on Friday.
Traders now estimate an 83% chance of a cut next month, up from 50% in the previous week, according to CME FedWatch. The big move underscored the challenges markets face in determining short-term interest rates in the absence of economic data caused by the longest US government shutdown, which ended on November 14.
Francesco Pesole, currency analyst at ING, said some “year-end rebalancing flows before Thanksgiving may hinder” dollar weakness.
However, he added in a note to clients, “unless the market has a hawkish rethink, the dollar looks too strong relative to short-term interest rate differentials at these levels, and we see some material downside risks.”
In other currency pairs, the yen, which has been on the defensive since hitting 10-month lows last week, strengthened on Tuesday to 156.055 per dollar, leaving the dollar down 0.5% against the Japanese currency.
Investors have been waiting for signs of official buying from Tokyo to support its currency, which has weakened nearly 10 yen since early October after fiscal official Sanae Takaichi took over as Japan’s prime minister.
Pesole said thinner liquidity ahead of Thanksgiving could provide good conditions for the Bank of Japan to intervene on USD/JPY, ideally after a market-driven correction in the pair.
Currency offer prices on November 25 15:58 GMT
Source: Reuters (Reporting by Gertrude Chavez-Dreyfuss in New York and Ozan Ergenay in London; Additional reporting by Ankur Banerjee in Singapore; Editing by Peter Graff, Louise Heavens and Tomasz Janowski)
