Aurelia Butler

SINGAPORE (Reuters) – The dollar flirted with a two-year peak on Thursday after the Federal Reserve signalled a slower pace of rate cuts in 2025, while the yen slid to a one-month low ahead of a policy decision by the Bank of Japan (BOJ) later in the day.The hawkish tilt from Fed Chair Jerome Powell and his team sent traders heavily dialling back on easing expectations next year and in turn sparked a broad dollar rally, sending currencies like the Swiss franc, the Canadian dollar and the South Korean won tumbling to milestone lows in early Asia trade on Thursday.”We think (the) decision marks the start of an extended pause from the FOMC, even if it is a little too early to say this explicitly,” said Nick Rees, senior FX market analyst at Monex Europe.”We now expect U.S. rates to stay on hold, at least through the first half of 2025. If right, then an upward adjustment in market expectations should support dollar upside over the coming months.”The Swissie bottomed at a five-month trough of 0.90215 per dollar, while the Canadian dollar sank to its lowest in over four years at 1.44655 per U.S. dollar.The won tumbled to its weakest level in 15 years.In stark contrast, the dollar index steadied at 108.15, near Thursday’s two-year top of 108.27.Powell said on Wednesday more reductions in borrowing costs now hinge on further progress in lowering stubbornly high inflation, with his explicit – and repeated – references to the need for caution from here on jolting markets globally.With the Fed’s final policy meeting of the year out of the way, focus now turns to those of the BOJ and the Bank of England (BoE) concluding later on Thursday, where both are expected to stand pat on rates.The yen sank to a one-month low of 154.88 per dollar ahead of the outcome, extending its 0.84% fall in the previous session.A more measured pace of Fed cuts next year is set to keep rate differentials between the U.S. and Japan wide for some time to come and the yen under pressure.”We expect that the BOJ will stand pat at the December meeting. Not because it can afford to pause and assess. But rather because it cannot afford to hike prematurely at this juncture,” said Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho (NYSE:MFG) Bank.”Despite sticky inflation, household confidence remains fragile. Crucially, rate hikes ahead of Trump 2.0 tariffs threaten to amplify potential demand shocks.”The euro meanwhile rose 0.18% to $1.0370, nursing its 1.34% drop in the previous session. Sterling was pinned near a three-week low at $1.25775.Down Under, the Aussie fell to its lowest in over two years at $0.6200, while the New Zealand dollar bottomed at $0.5614, also its weakest level since October 2022.The kiwi was further pressured by data on Thursday that showed New Zealand’s economy sank into recession in the third quarter, cementing the case for more aggressive rate cuts. More

WASHINGTON (Reuters) – President-elect Donald Trump Wednesday disrupted bipartisan efforts to avert a government shutdown as he pressured his fellow Republicans in Congress to reject a stopgap bill to keep the government funded past the end of the week.Trump instead urged Congress to pass legislation that would tie up loose ends before he takes office next month by raising the government’s borrowing authority — a politically difficult task — and extending government funding. He also said lawmakers should strip out elements backed by Democrats, whose support would be necessary for passage.Trump’s attempt to influence Congress more than a month before he takes office could complicate efforts to avert a shutdown that would disrupt everything from air travel to law enforcement in the days leading up to the Dec. 25 Christmas holiday.He warned that Republicans who vote for the current legislative package could have trouble getting re-elected.”Any Republican that would be so stupid as to do this should, and will, be Primaried,” Trump wrote on social media.It would be the first government shutdown since one that extended through December 2018 into 2019, during Trump’s first four-year White House term.Democrats currently hold a majority in the Senate, and Democratic President Joe Biden remains in power until Trump takes office on Jan. 20.The current bill would fund government agencies at current levels and provide $100 billion for disaster relief and $10 billion in farm aid. It also includes a wide range of unrelated provisions, such as a pay raise for lawmakers and a crackdown on hidden hotel fees.Trump said Congress should limit the bill to temporary spending and disaster relief and also raise the national debt ceiling now before it comes to a head next year.”Unless the Democrats terminate or substantially extend the Debt Ceiling now, I will fight ’till the end,” Trump said on his Truth Social site.Congress’s next steps were unclear. Bipartisan agreement will be needed to pass any spending bill through the House of Representatives, where Republicans currently have a 219-211 majority, and the Senate.The stopgap measure is needed because Congress has failed to pass regular spending legislation for the fiscal year that began on Oct. 1. It does not cover benefit programs like Social Security, which continue automatically.The U.S. government has spent more money than it has taken in for more than 20 years, as Democrats have expanded health programs and Republicans have cut taxes. An aging population is projected to push up the cost of retirement and health programs in the years to come. Steadily mounting debt – currently $36 trillion – will force lawmakers to raise the debt ceiling at some point, either now or when borrowing authority runs out next year. Failure to act could shock bond markets with potentially severe economic consequences.MUSK WADES INTrump’s comments came after his ally Elon Musk pressured Congress to reject the bill and said those who back it should be voted out of office.The Tesla (NASDAQ:TSLA) chief executive and world’s richest person, who spent more than $250 million to help Trump get elected, has been tasked by Trump to prune the federal budget.Unless Congress acts, the federal government will run out of money to fund operations on Saturday. The deal reached on Tuesday would have extended funding through March 14.House Republicans huddled in the office of Speaker Mike Johnson late Wednesday to determine their next move. Even before Trump and Musk weighed in, some on the party’s right flank had come out against the bill on the grounds that it spent too much money and included too many unrelated provisions.”The Speaker tried to get the votes and the necessary votes weren’t there. And then we saw what happened on social media, and a lot of folks have, you know, had second thoughts. And so now we got to recalibrate,” Representative Kevin Hern told reporters outside Johnson’s office.Republican Representative Mike Rogers (NYSE:ROG) said changes to the debt ceiling should not be included in the current negotiations.”It’s complicated enough without that,” he told reporters. Democrats said Republicans had walked away from a bipartisan deal.”House Republicans have been ordered to shut down the government and hurt everyday Americans all across this country,” House Democratic Leader Hakeem Jeffries said at a news conference. “House Republicans will now own any harm that is visited upon the American people that results from a government shutdown.” Trump in the past has sometimes voiced support for government shutdowns, and the 2018-2019 one was the longest in U.S. history, lasting 34 days.Musk has emerged as one of the biggest spenders in U.S. politics this year, and his threat could resonate with some Republicans. It likely carries less weight with Democrats who represent solidly liberal areas, or senators from both parties who will not be up for reelection for another six years. Musk tried and failed in November to influence the outcome of the Senate Republicans’ leadership contest.A wide range of government services would be disrupted if Congress does not act before Saturday, including agencies like the Pentagon and NASA that do business with Musk’s companies. More

Morgan Stanely analysts said they no longer expect a 25 basis point cut in January 2025, and that the Fed will only cut rates by 25 basis points each in March and June. “The Fed’s hawkish turn appeared to reflect the incorporation of potential changes to trade, immigration, and fiscal policy by some members that led to a firmer inflation path and, in turn, a firmer policy rate path,” Morgan Stanley analysts wrote in a note. They still expect the Fed to cut rates at least thrice in 2026, but now see a higher terminal rate of 2.6%, compared to prior forecasts of 2.4%. Morgan Stanley’s revised rate outlook comes following similar moves by several of its peers. Goldman Sachs had also signaled earlier this week that it no longer expected a January cut, citing concerns over sticky inflation and strength in the labor market.Traders were seen ramping up bets on a January hold, with a 91.1% chance the Fed will keep rates steady, up from last week’s probability of 75.4%, CME Fedwatch showed.The Fed cut interest rates by 25 basis points on Wednesday, as widely expected. But the central bank struck a more hawkish tone than markets were expecting, as Chair Jerome Powell warned that the Fed will adopt a slower pace of cuts in the coming months. The central bank slashed its rate cut outlook for 2025, and is expected to cut rates only twice in the coming year. Powell flagged strong economic growth in the second half of 2024, and said that downside risks to the labor market had eased, necessitating a slower pace of monetary easing. The incoming Donald Trump administration could also provide more upside risks to inflation, especially amid pledges of expansionary and protectionist policies from the President-elect.  More

WASHINGTON (Reuters) – The world’s economic reckoning with the incoming administration of U.S. President-elect Donald Trump began in earnest this week, with some Federal Reserve officials penciling in estimates for higher inflation and restrictive interest rates, a surprise resignation in Canada over budgeting for prospective tariffs and a hyper focus on a potential status upgrade for bitcoin.The Fed cut rates as expected on Wednesday amid a busy year-end run of central bank meetings from Ottawa and Frankfurt to Tokyo and London that showed officials starting to deal with heightened uncertainty ahead of the world’s largest economy coming under Trump’s leadership early in the new year.Indeed, Fed officials not only dialed back projections for how much further U.S. borrowing costs can fall in the face of stiffer-than-expected inflation, Fed Chair Jerome Powell said some among them were already taking a shot at judging how Trump’s plans such as higher tariffs, lower taxes and a crackdown on immigration might affect their monetary policymaking in the months ahead.The upshot was U.S. central bankers penciled in estimates for higher growth next year than previously estimated, but also notably higher inflation. That left Powell repeatedly citing a need for “caution” about committing to additional rate cuts from here, a tone that triggered a slide in stock prices and a recalibration of market estimates for further easing: Just a single Fed rate cut is now priced in for 2025.”Some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policies into their forecasts at this meeting,” Powell said in response to a question about the degree to which Trump factored into officials’ thinking. “Some people said they didn’t do so, and some people didn’t say whether they did or not, so we have people making a bunch of different approaches to that but some did identify policy uncertainty as one of the reasons for their writing down more uncertainty around inflation.”Ahead of the Fed decision, rates had already been lowered last week by the European Central Bank and Bank of Canada, with both expected to deliver some additional easing in 2025 amid weakening outlooks.While ECB President Christine Lagarde was vague about further rate cuts, she went out of her way to emphasize downside risks to growth, including from prospective trade tensions with the United States under Trump.Meanwhile, rate decisions are due in the coming hours from central banks in Japan, Sweden, Norway and the United Kingdom (TADAWUL:4280). A Reuters survey of Japanese businesses published last week showed nearly three-quarters expect Trump to have a negative effect on their operating environment, something Bank of Japan officials may have to reckon with as the world’s lone developed central bank still trying to tighten policy. UPHEAVALWhile Trump may have been just at the periphery of officials’ thinking at the Fed in Washington, he was a central focus in Ottawa when Canadian Finance Minister Chrystia Freeland quit after clashing with Prime Minister Justin Trudeau on issues including how to handle possible U.S. tariffs under the next U.S. administration.Freeland exited on Monday just hours before she was due to present a fall economic update to parliament. The document showed the minority Liberal government had run up a 2023/24 budget deficit of C$61.9 billion, much higher than predicted.Freeland said the threat of new U.S. tariffs represented a grave danger after Trump last month warned he would issue levies on goods imported from Canada and Mexico of 25% unless the two U.S. neighbors limit the flow of migrants and fentanyl into the U.S.”That means keeping our fiscal powder dry today, so we have the reserves we may need for a tariff war. That means eschewing costly political gimmicks, which we can ill afford,” she wrote in a letter to Trudeau posted on X.Meanwhile, crypto market enthusiasm for Trump’s notion of establishing a strategic reserve of bitcoin was dealt a setback when Powell said the Fed had no legal authority to hold it, adding declaratively that it had no plan to seek a change in the law so that it could.”That’s the kind of thing for Congress to consider, but we are not looking for a law change at the Fed,” Powell said.The remark contributed to a broad slide in crypto-related assets, including a 5% drop in bitcoin itself, its largest decline in more than three months.  More

LONDON (Reuters) – The Bank of England looks set to hold interest rates at 4.75% on Thursday, despite signs of a slowing economy, as persistent inflation pressures limit it to a “gradual” approach towards cutting borrowing costs.All 71 economists polled by Reuters said rates would stay unchanged for now. Most expect a quarter-point cut only on Feb. 6 after its next meeting, followed by three more cuts by the end of 2025.Financial markets are much less certain about the extent of rate cuts next year, following data on Tuesday that showed an unexpected acceleration of wage growth. Investors late on Wednesday priced in just a 50% chance of a rate cut in February and only two cuts in 2025 as a whole.By contrast, the European Central Bank has cut rates by 1 percentage point in 2024 and is expected by markets to lower them by another percentage point in 2025 as the euro zone economy is hit by political turmoil and the risk of a U.S. trade war.The divergence in interest rate outlooks has pushed the difference in yields between British and German 10-year government bonds to its widest since 1990.While the U.S. Federal Reserve only expects to lower rates twice next year, its rate cut on Wednesday added up to a cumulative 1 percentage point of loosening in 2024, double the speed of the BoE so far.Governor Andrew Bailey this month reaffirmed the BoE’s message that “a gradual approach to removing policy restraint remains appropriate”.The BoE’s November forecasts – which showed inflation staying just above its 2% target until 2027 – were based on market expectations of four rate cuts next year.BoE officials have not been explicit about whether they view this pace of cuts as the most likely scenario.Economists expect the BoE to stick to its vaguer message of gradualism in December’s policy statement.”We think it’s too early for the BoE to pre-commit to a sustained cutting cycle or to conclude that risks to inflation returning sustainably to the 2% target in the medium term have dissipated,” Bank of America analysts said in a note to clients.Most economists polled by Reuters expect an 8-1 Monetary Policy Committee vote to keep rates unchanged. Swati Dhingra, who has called for faster cuts, is seen as the likeliest dissenter.INFLATION AND WAGE GROWTH TOO HIGHBritish consumer price inflation – which peaked at a 41-year high of 11.1% in October 2022 – fell below the BoE’s 2% target for the first time in three and an half years in September, but rose to 2.6% in November.That exceeded the BoE’s own forecast of 2.4% and was the highest rate among the Group of Seven advanced economies. Services price inflation, which the BoE views as a better guide to medium-term price pressures, held at 5.0%.The bigger concern is wage growth, which hit an annual 5.2% in the three months to October – well above the 3% rate most MPC members view as consistent with 2% inflation.The BoE is watching to see if finance minister Rachel Reeves’ decision to load an extra 25 billion pounds ($32 billion) of employment taxes on businesses leads to more price rises or to cuts to jobs and pay.Business sentiment has tumbled since Reeves’ Oct. 30 budget, and economic output fell for two consecutive months for the first time since 2020.However, most economists say it is too early to know if this slowdown will put much downward pressure on inflation.”We don’t think there is enough in the data to shift the MPC from its cautious, gradual tone,” RBC economist Cathal Kennedy said, adding that new BoE forecasts at its February meeting would be key. ($1 = 0.7882 pounds) More

The local currency hit its weakest-ever mark of 6.3139 to the dollar before closing down 2.9% at 6.2896. It was its largest daily decline since November 2022. The currency earlier closed for trading locally at 6.26, down 2.7%.Further weighing on the real late in the session, the U.S. Federal Reserve cut interest rates on Wednesday and signalled it will slow the pace at which borrowing costs fall, strengthening the dollar across the board.The benchmark Bovespa stock index closed at a six-month low, down 3.15% in its largest daily percentage drop since November 2022.The cost of insuring exposure to the country’s bond debt was at a 14-month high, with investors anxious as Latin America’s largest economy faces a deepening financial market crisis.Investors have been doubtful whether lawmakers will be able to pass the main part of a fiscal bill aimed at putting government finances on a more sustainable footing.”Markets are mainly worried about the overall fragile fiscal trajectory and the fact that it is affecting inflation expectations via the pressure on the real,” said Thomas Haugaard, portfolio manager at Janus Henderson in Copenhagen.”Often we have to see the market revolting before painful adjustments come, but for now it does not look like there will be a fiscal response to the recent turmoil.”Congress late on Tuesday approved the main text of a bill but has yet to vote on some amendments proposed by lawmakers, while Finance Minister Fernando Haddad said Wednesday the Senate is ready to vote on the bill as soon as Congress sends it.”We are doing our part: sending (Congress) the measures, working to make sure they are not watered down, and convincing people these measures are needed to strengthen the fiscal framework,” Haddad said.Brazil’s central bank held spot U.S. dollar auctions for the third consecutive session on Tuesday and reaffirmed its tough monetary policy stance.”The central bank hiked more than expected and have been intervening in the currency so they are doing their part,” said Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management.The local sovereign bond benchmark yield closed at 14.77% on Wednesday, having on Tuesday hit 14.847%, the highest since March 2016. The yield started the year around 10.5%.”At this point the bar is very, very low for a positive fiscal surprise,” said Arif Joshi, co-head of the emerging markets debt platform at Lazard (NYSE:LAZ) Asset Management.He said fiscal consolidation must move beyond bets that stronger growth will make the fiscal side look healthier and into actual spending cuts.”It always starts with baby steps and it builds from there,” Joshi said. “We’re not looking for the full bazooka, we’re looking for baby steps in the right direction.”Five-year credit default swaps, the cost to insure against a sovereign default, stood at 194 basis points according to S&P Global Market Intelligence -the most expensive since October 2023. The dollar-denominated MSCI Brazil index has fallen more than 30% since the start of the year.Brazil’s nominal budget deficit, including interest payments on public debt, has climbed to 9.5% of GDP from 4.6% when President Luiz Inacio Lula da Silva took office in January 2023. More

HONG KONG (Reuters) – The Hong Kong Monetary Authority (HKMA) on Thursday cut its base interest rate charged via the overnight discount window by 25 basis points to 4.75%, tracking a move by the U.S. Federal Reserve.Hong Kong’s monetary policy moves in lock-step with the United States as the city’s currency is pegged to the greenback in a tight range of 7.75-7.85 per dollar. More