The U.S. dollar hovered near a four-week high against the euro on Thursday, supported by persistent inflation data that bolstered expectations the Federal Reserve would avoid making a large interest rate cut at its upcoming meeting.
Meanwhile, the European Central Bank (ECB) is widely expected to announce a quarter-point rate cut later in the day, with investors eagerly watching for signals on the timing of future reductions.
The dollar strengthened against the yen after a volatile session the previous day, during which the U.S. currency fell as much as 1.24% to its lowest level this year, before regaining all its losses following U.S. inflation data.
On Wednesday, Bank of Japan (BOJ) board member Junko Nakagawa emphasized the central bank’s tightening stance, stating that low real interest rates allow room for further rate hikes. On Thursday, fellow BOJ board member Naoki Tamura, known for his hawkish views, said that the market’s expectations for the pace of tightening might be too slow, which helped limit yen losses.
According to Shoki Omori, chief Japan desk strategist at Mizuho Securities, the speeches mark a shift in the BOJ’s communication style. “The BOJ is now trying to guide the market toward pricing in a rate hike through forward guidance rather than using media outlets, which is a positive change,” he noted. “However, markets are still adjusting to this approach, contributing to the increased volatility in the yen recently.”
As of 0505 GMT on Thursday, the dollar gained 0.31% to 142.805 yen, after reaching a 0.41% increase earlier. In the previous session, the dollar had dipped as low as 140.71 yen, its lowest since December 28, following Nakagawa’s comments.
Tony Sycamore, an analyst at IG, noted that the rebound in the dollar-yen pair suggests potential for further recovery toward 145.50 yen, after hitting a low of 140.71. The pair tends to follow U.S. long-term Treasury yields, which surged after dipping to a 15-month low of 3.605% on Wednesday and continued to rise during Thursday’s Asian session, standing at 3.6646%.
U.S. inflation data showed the consumer price index (CPI) rose 0.2% in August, matching July’s increase. Excluding food and energy, the core CPI rose by 0.3%, accelerating from the previous month’s 0.2% gain. As a result, traders have largely ruled out the possibility of a 50-basis point rate cut by the Fed on September 18, with only a 15% chance now priced in for a larger cut, while an 85% probability remains for a 25-basis point reduction.
However, markets are still pricing in a total of 104 basis points in cuts by the end of the year, suggesting that a 50-basis point cut could occur at either the November or December meeting.
TD Securities analysts, including global FX strategist Jayati Bharadwaj, observed that “market expectations for Fed rate cuts in 2024 had been near their peak, making them vulnerable to stronger U.S. data.” The analysts added that the dollar remains structurally undervalued, given ongoing macroeconomic, political, and geopolitical uncertainties, and they maintain a bullish outlook for the dollar against the euro.
As for the ECB, markets are fully expecting a quarter-point rate cut on Wednesday, following June’s reduction, with various policymakers backing another cut. The euro remained flat at $1.10165, near its lowest level since August 16, when it briefly touched $1.1002.
The British pound held steady at $1.3050, having dipped to $1.30025 in the prior session, its lowest since August 20. Meanwhile, the Swiss franc weakened slightly, with the dollar gaining 0.11% to 0.8531 francs, after hitting a high of 0.8544 francs on Wednesday, its strongest since August 21.
Risk-sensitive currencies, such as the Australian and New Zealand dollars, firmed as Asian stocks followed Wall Street gains. The Australian dollar rose 0.22% to $0.6690, while New Zealand’s kiwi advanced 0.23% to $0.6152.
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