SINGAPORE—The dollar firmed on Friday after two days of declines but was still on track for its fifth straight weekly gain as investors scaled back expectations for Federal Reserve rate cuts, while the yen was anchored around the key 150 per dollar level.
The dollar had come under pressure after mixed U.S. data, with retail sales falling more than expected in January, while a separate report underscored labour market tightness.
Some analysts said the U.S. currency’s rebound could have run out of steam.
The dollar retracement “has been much greater than the retracement in U.S. yields and that might mean there are limits to further dollar strength over the near-term,” said Derek Halpenny, head of research, global markets EMEA at MUFG.
“Still, in a backdrop of near recessionary conditions in Europe and Japan and a real estate crisis in China, we would continue to see upside risks for the dollar,” he added.
The dollar index, which measures the U.S. currency against six major rivals, was up 0.1 percent at 104.33 on Friday, having eased around 0.6 percent the two previous days. The index is on course to eke out a 0.23 percent gain for the week, its fifth in a row.
Federal Reserve chair Jerome Powell remarks early this month and strong U.S. data has quashed expectations of early and deep rate cuts from the Fed.
Traders are now pricing in a 53 percent chance of a rate cut in June, according to the CME FedWatch tool, while had initially priced in March as the starting point of the Fed’s easing cycle.
They expect 100 basis points (bps) of cuts this year, much lower than the 160 bps priced in at the end of 2023.
“The dollar correction (this week) is again the symptom of some investors’ impatience to join what remains a consensus view, despite recent data, that the U.S. will decline at some stage in 2024,” said Francesco Pesole, forex strategist at ING.
“This is also why we think EUR/USD is not too far from a supporting floor despite more dollar strength in the near term.”
The euro was down 0.04 percent to $1.0769, set for a small decline in the week and not far from the three month low of $1.0695 it touched earlier this week.
Investors focus on European Central Bank speakers after president Christine Lagarde reiterated its cautious stance on easing monetary policy. Bank of France head Francois Villeroy de Galhau said on Friday the ECB should not hold off for too long on an initial interest rate cut this year.
Yen Worries
The Japanese yen weakened 0.22 percent to 150.24 per dollar, hovering around the 150 mark, a level that puts the market on alert for possible intervention by Japan to support its currency as well as comments from officials.Finance Minister Shunichi Suzuki said that while a weak yen has merits and demerits, he was “more concerned” about the negative aspects of a weak currency.
“Diminishing effectiveness of verbal interventions may require Japanese officials to take concrete action to slow down the pace of yen depreciation if U.S. Treasury yields rise further,” said Kieran Williams, head of Asia FX at InTouch Capital Markets.
The yen, which is highly sensitive to U.S. rates, is down 6 percent against the dollar this year as investors pare back their expectations of rate cuts from the Fed.
“We expect the Bank of Japan (BoJ) to start hiking policy rates from April 2024 amid persistent inflation and strong wage growth, but at a 10bp per quarter pace, which is unlikely to roll back the robust carry trade momentum,” said Shinichiro Kadota, chief forex strategist at Barclays Japan.
He also mentioned “the 152 forex intervention threshold from last autumn.”
BOJ Governor Kazuo Ueda said on Friday the central bank will examine whether to maintain its various monetary easing measures, including negative interest rates, when sustained achievement of its inflation target comes into sight.
The Australian dollar eased 0.08 percent to $0.65195, while the New Zealand dollar is down 0.16 percent to $0.60965.
