Dollar Hovers Near 2-1/2-month Lows, Easing Pressure on Yen

REUTERS/Dado Ruvic/Illustration/File Photo/File Photo
Japanese Yen and U.S. dollar banknotes are seen in this illustration taken March 10, 2023.

TOKYO (Reuters) – The dollar index held around 2-1/2-month lows after minutes of the Federal Reserve’s last meeting did little to dislodge market expectations that its monetary tightening cycle was over.

The Fed minutes showed the central bank would proceed “carefully” and that “all participants judged it appropriate to maintain” the current rate setting.

Fed officials agreed they would only raise interest rates if progress in controlling inflation faltered, reiterating recent comments by policymakers that left the door open for more tightening even as markets have moved to price in cuts from early next year.

“The release of the FOMC November minute did little to sway the opinion that the Fed have reached their terminal rate,” said Matt Simpson, senior market analyst at City Index.

Markets are all but certain that the Fed will hold rates at their December meeting, while pricing in about a 30% chance of a rate cut as early as March, according to CME’s FedWatch Tool.

The dollar index =USD, which measure the greenback against a basket of currencies, was flat at 103.58, near levels last seen in early September but off an overnight session low of 103.17.

The euro EUR=EBS last sat at $1.0912 after rising to its highest against the dollar since mid-August to $1.0966 on Tuesday.

Sterling GBP=D3 was mostly flat at $1.2534, not far from a two-month high of $1.2554 touched overnight.

“We’re seeing signs that the dollar bearish move is running out of steam” and could be “due to bounce,” Simpson said, adding that the greenback has a tendency to weaken and then strengthen around the time of the U.S. Thanksgiving holiday, which happens on Thursday.

U.S. Treasury yields, which have buoyed the dollar, have also tumbled from multi-year highs hit in October as investors ramp up bets that the Fed is done hiking rates following a slowdown in U.S inflation in the same month. Treasury yields slipped again overnight to hover around 4.40%, easing further pressure on the yen.

The Japanese yen JPY=EBS advanced around 0.1% versus the greenback to 148.28, clinging to recent gains after ticking up slightly from as low as 147.155 overnight.

While speculation that the Bank of Japan could exit from negative interest rates early next year should help stabilize the yen, the Japanese currency still faces strong headwinds.

Recent U.S. data have pointed to the resilience of the world’s biggest economy, bolstering the Fed’s soft landing narrative.

U.S. “growth after the current rebalancing is still expected to outperform, which will support U.S. earnings and yields,” said Tony Sycamore, market analyst at IG.

The dollar still holds “a significant yield advantage over the (yen),” he added.