Dollar Holds Near One-Month Peak as Dovish Fed Bets Recede

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 held close to a one-month peak versus major peers on Thursday after robust U.S. retail sales data overnight added to building expectations the Federal Reserve will not rush to lower interest rates.

Australia’s dollar weakened after data showed an unexpected decline in employment.

The U.S. dollar index, which measures the currency against a basket of six rivals, traded little changed at 103.36 in the Asian morning, after reaching 103.69 on Wednesday for the first time since Dec. 13.

The yen was a notable underperformer, as it tends to move in the opposite direction of U.S. long-term yields, which also touched a one-month high overnight as dovish Fed bets receded. At the same time, investors steadily priced out hawkish Bank of Japan wagers, not least due to the devastating New Year’s Day quake in central Japan. The BOJ meets on policy on Monday and Tuesday of next week.

Traders have trimmed the odds of a first Fed rate cut by March to 53.8%, down from 63.1% on Tuesday, according to CME’s FedWatch Tool.

The market is still pricing in a likely 150 basis points of cuts by the end of the year, even as Fed officials including Governor Christopher Waller this week pushed back against expectations of rapid policy loosening.

Interest rate pricing “appears overly optimistic given the latest retail sales report shows the U.S. consumer remains in good shape,” Tony Sycamore, an analyst at IG wrote in a client note.

On the dollar’s push as high as 148.525 yen overnight for the first time since the end of November, surpassing Sycamore’s expectations for a test of 148, Sycamore wrote “given the speed of the rally, it does raise questions about our view that the rally is countertrend.”

The dollar was last about flat at 148.135 yen.

Meanwhile, the euro was little changed at $1.08845.

ECB President Christine Lagarde told Bloomberg there would likely be majority support among ECB officials for an interest rate cut in the summer, although she stressed they would be data-dependent.

Sterling was also flat at $1.26765, following a rally on Wednesday after data showed inflation unexpectedly accelerated in December, reinforcing expectations the Bank of England will be slower to cut rates than its peers.

The British currency’s 0.31% overnight jump snapped a three-day decline against the greenback, and limited Wednesday’s gains for the dollar index, of which Sterling is a part.

Elsewhere, the Australian dollar weakened after data showed a 65,100 drop in jobs for December, where economists had forecast a 17,600 increase.

The Aussie slid as much as 0.4% to $0.65255 before last trading 0.14% lower at $0.65425.