The dollar is heading for a second consecutive week of gains, today on Friday, as indications of the strength of the US economy and caution from central bank officials regarding interest rate cuts have led traders to lower their expectations of a rapid and steep reduction in rates.
It is expected that the weekly gains for the Australian dollar will be 1.6% and for the New Zealand dollar will be 2.3%, the highest since November and July respectively. Market participants anticipate a 57% likelihood of a decrease in interest rates in March from 75% a week ago.
Richard Fragnolovich, Head of Foreign Exchange at Westpac, said, “The strong message conveyed by US activity data and central bank officials is that the markets are strongly considering a reduction in interest rates in 2024, whether in terms of timing or percentage.”
“In addition to causing a new wave of turmoil in China’s real estate and financial markets, this led to a resurgence of the dollar’s strength.”
The dollar index rose by 0.9% to 103.4 points during the week, with the yen being the biggest loser as it has dropped by 5% so far this year. The data and the devastating earthquake have shaken confidence in the belief that the Bank of Japan is about to raise interest rates.
The yen dropped by around 0.2% to 148.44 against the dollar.
The euro declined by 0.6% during the week, reaching 1.0884 dollars.
The British pound decreased by 0.4% to $1.2705.
The Australian dollar received some support from the stabilization of iron ore prices and rose by 0.1% to $0.6578.
The New Zealand dollar settled at 0.6099 dollars.
Data released yesterday, Thursday, showed the strength of the US job market with a decline in weekly jobless claims to their lowest level in about one and a half years, leading to a decrease in market bets on interest rate cuts.
This week, the yields on two-year treasury bonds increased by 22 basis points to 4.3587%.
Earlier data showed that retail sales rose more than expected in December. Christopher Wall, a member of the Federal Reserve Board, said on Tuesday that the strength of the US economy gives policymakers flexibility to move “cautiously and slowly,” which traders considered as an indication that interest rate cuts will not happen quickly.
Similar statements from officials in European central banks have also led to decreased expectations of interest rate cuts in Europe, thereby limiting the euro’s decline against the dollar.
