Dollar set for strongest week since July on reduced rate cut bets

That helped the dollar shrug off weakness and against a basket of currencies, the U.S. currency was last at 102.39 in early trade on Friday. The dollar index is up 1% for the week, its strongest performance since the week ending July 23.

The dollar’s rebound will be tested by the nonfarm payrolls report due later in the session. Economists polled by Reuters forecast that 170,000 jobs were created in December, fewer than the 199,000 in November.

“The USD strength we are seeing at the start of 2024 may have more to do with safe-haven demand as equity markets have struggled and market volatility has increased,” said Hamish Pepper, fixed income and currency strategist at Harbor Asset Management.

Traders have dialed back rate cut bets, with markets now pricing in a 65% chance of a rate cut in March, compared to 86% chance a week earlier, CME FedWatch tool showed. They are also pricing in less than 140 basis points of cuts this year versus 160 basis points at the end of December.

Some analysts still see market expectations as too aggressive.

The dollar is likely to be supported by an increase in U.S. rates, relative to the rest of the world, as “Fed rate cut expectations prove too aggressive,” Pepper said.

“While core PCE inflation has dropped quickly to around 3%, this is not the 2% that the Fed targets and the last mile may require policy rates to stay at more elevated levels for longer than anticipated.” Inflation, as measured by the personal consumption expenditures price index, rose 2.6% in the 12 months through November.

The dollar’s ascent has seen the Japanese yen weaken considerably this week, with the Asian currency down 2.5% against the dollar, on course for its weakest weekly performance since June.

On Friday, the yen weakened 0.06% to 144.72 per dollar, having touched a more than two-week low of 144.90 earlier in the session.

The euro was last up 0.09% at $1.0953, on track for 0.8% decline in the week, snapping a run of three weeks of gains. Sterling was last at $1.2694, up 0.12% on the day, but still on course for a small decline for the week.

In cryptocurrencies, bitcoin dropped 0.91% to $44,082.61. Ether fell 0.53% to $2,263.75.