(Reuters) -The dollar firmed on Friday after two days of declines and 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.
Investors await U.S. producer price data later in the session which could provide an update on key services components of the Personal Consumption Expenditure (PCE) index, the Fed’s preferred inflation gauge.
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 0.02% at 104.26 on Friday, having eased around 0.6% the two previous days. The index is on course to eke out a 0.18% gain for the week, its fifth in a row.
Remarks by Federal Reserve Chair Jerome Powell early this month and strong U.S. data have quashed expectations of early and deep rate cuts from the Fed.
Traders are now pricing in a rate cut in June, according to the CME FedWatch tool, which had initially priced in March as the starting point of the Fed’s easing cycle.
They discount 100 basis points (bps) of cuts this year as the most likely outcome, 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 up 0.05% to $1.0778, but set for a 0.55% decline on the week.
BofA reiterates its forecast of a euro/dollar exchange rate of 1.15 at year-end.
“We expect the European Central Bank (ECB) to start cutting rates at the same time and at the same pace (as the Fed), we have been arguing that Fed cuts matter more for markets, as they have global implications and affect overall risk sentiment,” said Athanasios Vamvakidis, global head of forex strategy at BofA, who sees the greenback as overvalued.
Increasing risk appetite usually weakens the dollar which market participants see as a safe-haven asset.
Investors focused on ECB speakers after President Christine Lagarde reiterated the bank’s cautious stance on easing monetary policy. Francois Villeroy de Galhau said the ECB should not hold off for too long on an initial cut, while Isabel Schnabel argued that sluggish productivity growth may slow the inflation fall.
The pound briefly flickered higher on Friday after data showed UK retail sales grew at their fastest pace in nearly three years in January, beating expectations, but did little to shift expectations around Bank of England monetary policy.
YEN WORRIES
The Japanese yen weakened 0.18% to 150.16 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% 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.
The Japanese government and wealthy Japanese, especially pensioners, are running a massive carry trade funded in local bank liabilities and invested in domestic and foreign assets.
Source: Economy - investing.com
