The U.S. dollar hovered near seven-month lows on Tuesday, as market participants expect a possible rate cut by the Federal Reserve starting next month. All eyes are on Federal Reserve Chairman Jerome Powell’s highly anticipated speech on Friday at the annual gathering of central bankers in Jackson Hole.
A weaker dollar pushed the euro to its highest level this year, while sterling approached a one-month high. The MSCI Emerging Market Currency Index also reached a record peak.
In contrast, the Swedish crown saw a decline after the Bank of Sweden announced a 25 basis point rate cut and expected two or three additional cuts in 2024. The crown was trading down 0.33% at 10.27 against the dollar.
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The imminent release of the minutes of the Fed’s last meeting on Wednesday is also in the spotlight. Analysts are debating whether the Fed will opt for a more modest rate cut of 50-75 basis points or a sharper cut of 150 basis points or more over the course of the year. The Jackson Hole conference will provide the first indication of the Fed’s stance on the possibility of a 50 basis point rate cut at one of the remaining meetings this year.
Although there are some signs of a weakening labor market, which initially led to expectations of a deeper rate cut in September September, recent data has been mixed. For example, retail sales figures indicate that consumer demand remains strong.
According to Macquarie’s global forex and interest rate strategist, the US economy is vulnerable to recession in the event of a financial shock. However, he suggests that if such a shock does not occur, growth may remain subdued until the Fed adjusts interest rates adequately.
Current market pricing points to a 24.5% chance of a 50 basis point rate cut in September September, down from 50% a week ago. Meanwhile, a 25 basis point reduction is seen as a 75.5% possibility. Traders account for a total of 93 basis points in this year’s cuts.
A slim majority of economists polled by Reuters expect the Federal Reserve to cut interest rates by 25 basis points at each of the three remaining meetings of the year.
The euro traded at $1.1077 on Tuesday after hitting $1.1087, its highest level since Dec. 28, December, earlier in the day. The currency is up 2.4% this month and is on track for its best monthly performance since November.
The dollar index, which compares the greenback to six other major currencies, last hit 101.86, after earlier touching a low of 101.76, its lowest level since Jan. 2. The index fell more than 2% in August August and is heading for a second consecutive monthly decline.
Expectations of a U.S. interest rate cut also sent both the Australian and New Zealand dollars closer to one-month highs.
The Japanese yen was trading slightly weaker at 146.98 against the dollar, still near the almost two-week high hit in the previous session. The yen has recovered from a seven-month high of 141.675 reached at the beginning of August, August, after
