Written by Vidya Ranganathan and Stefano Rebaudo
SINGAPORE (Reuters) – The dollar edged lower on Monday after gaining strength on Friday’s positive U.S. jobs report and escalating conflict in the Middle East.
The dollar’s strength came on the back of September’s U.S. jobs report showing the largest increase in six months, a decline in the unemployment rate and solid wage gains, all of which point to economic resilience. The market was forced to lower its expectations for a Federal Reserve (Fed) interest rate cut.
Analysts say many of the factors that weighed on the dollar through the summer have reversed, with recession fears fading and prices suggesting the data set has reached the pricing limit of the dovish reaction function. I mentioned the trends.
“We don’t see any impetus to rebuild structural US dollar short positions in the coming weeks,” said Francesco Pesole, foreign exchange strategist at ING.
“The market appears to have given up on another 50bps rate cut, and the inflation numbers are unlikely to change that. The situation in the Middle East may not get any worse, but the consensus is that significant easing is unlikely at this point. It’s like,”’ he added.
The dollar index against major peers fell 0.05% to 102.48. It rose 0.5% on Friday to a seven-week high, and for the week it rose more than 2%, its biggest gain in two years. It was just over 100 early last week.
MUFG warned that this is the second time in recent years that the dollar index has fallen back towards the support at the 100.00 level. The last time the dollar index was tested in July 2023, it was unable to break below the 100.00 level and showed a strong rebound (+7.8%) in the following three months.
The yen fell slightly to 149.10 yen to the dollar, the lowest level since August 16, and has since narrowed its decline to trade around 148.40 yen. This was on top of last week’s more than 4% drop and was the biggest weekly decline since early 2009.
“If interest rate cuts remain the default position, rising earnings expectations and China’s tough liquidity and fiscal stance, the equity bull market and the U.S. dollar will take a hit.” said Chris Weston. Australian online broker Pepperstone.
“Geopolitical headlines and the possibility of an energy supply shock continue to pose a threat to sentiment, but those with long risk exposures saw no significant movement in markets over the weekend, and the outlook for further economic growth remains uncertain. We’re entering the new trading week feeling pretty good about the upside. ”
In the Middle East, Israel bombed Hezbollah targets in Lebanon and the Gaza Strip on Sunday, ahead of the first anniversary of the Oct. 7 attacks that sparked the war. Israel’s defense minister also declared that all options remain open for retaliation against arch-enemy Iran.
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The euro fell 0.06% to $1.0970.
The yen’s underperformance is also related to new Prime Minister Shigeru Ishiba’s comments last week that fueled expectations that Japan’s interest rate hikes would be further in the future.
The yield on the 10-year U.S. Treasury note hit a two-month high of 3.9920% in early London trading.
However, Barclays believes there is room for an increase of about 20 basis points, even after taking into account the worst-case scenario of an economic downturn.
Markets expect the Federal Reserve to cut interest rates by only 25 basis points in November, rather than 50 basis points, in response to the jobs report. According to CME’s FedWatch tool, they are now pricing in a 95% chance of a quarter-point rate cut, up from 47% a week ago, and a 5% chance of no rate cut at all. are.
“The dollar-yen pair will remain weak as long as tensions in the Middle East subside due to lower expectations for a significant rate cut by the Federal Reserve in November and the Japanese prime minister’s dovish stance ahead of the October 27th general election. We expect it to hover around 145 to 149 yen for the next few weeks,” said Singapore SMBC economist Ryota Abe.
The pound was also flat around $1.3122, down 1.9% last week, its biggest decline since early 2023.
Bank of England chief economist Hugh Pill said on Friday, a day after Governor Andrew Bailey said the BoE could act more aggressively to lower borrowing costs, the central bank said the rate cuts would be gradual. He said that it should be done accordingly.
(Reporting by Vidya Ranganathan and Stefano Rebaudo; Editing by Shri Navaratnam and Ed Osmond)
