Dollar nears 2-1/2-month low as labour data leaves rate path uncertain

SINGAPORE: The US dollar was steady on Wednesday and near its lowest since the start of October after data showed the labour market remained soft, leaving investors on edge about when the next rate cut from the Federal Reserve is likely to come.

The euro was last at $1.1751 in Asian hours, just shy of the 12-week high it touched in the previous session ahead of the policy decision from the European Central Bank on Thursday, where the central bank is expected to hold rates steady.

The dollar index, which measures the US currency against six rivals, was at 98.193, hovering near the lowest level since October 3 which it hit on Tuesday.

The index is down 9.5% this year, on pace for its steepest annual decline since 2017.

While the US economy added 64,000 jobs in November, surpassing an estimate from economists polled by Reuters, the unemployment rate was at 4.6% last month, although the 43-day government shutdown distorted the data. Still, markets and analysts were unsure if the report had changed the policy outlook much and awaited the inflation report due on Thursday.

“The combined data painted a picture of anaemic job growth,” said IG market analyst Tony Sycamore.

“While not soft enough to bring a January rate cut into play, the persistent rise in unemployment keeps the door open for an easing at the March FOMC meeting should subsequent employment reports show continued deterioration.”

The Fed cut rates as expected last week but signalled borrowing costs are unlikely to drop further in the near term, projecting just one more rate cut in 2026.

Markets though are pricing in two rate cuts next year, although future pricing suggests a move is unlikely in January.

“If CPI comes in as expected later this week then the Fed will definitely not be feeling pressure to ease at the next few meetings,” said Thomas Mathews, head of markets for Asia-Pacific at Capital Economics.

“Even March may be a bit too soon to expect a cut.”  

Central bank meetings in focus

 Central banks are due to end the year with a bang with a host of policy decisions due toward the end of the week.

Apart from the ECB, the Bank of England is likely to cut rates in a close vote on Thursday, while the Bank of Japan is expected to raise interest rates on Friday to a three-decade high. Sterling was steady at $1.3424, just below the two-month high it touched on Tuesday after data showed Britain’s unemployment rate hit its highest since the start of 2021 and private sector pay growth was the weakest in nearly five years in the run-up to finance minister Rachel Reeves’ annual budget last month, reinforcing the expectations of a rate cut. The yen firmed a bit to 154.56 per US dollar, near a two-week high ahead of the BOJ meeting.

With markets broadly expecting a rate hike, the focus will be on the forward guidance and where the policy path is headed in the next year.

Thierry Wizman, global FX & rates strategist at Macquarie said the move from the BOJ is a response to the inflationary pressures associated with a weak yen and a new political willingness to address Japan’s own ‘affordability crisis’.

“We’re more bullish on the JPY than on the GBP, and foresee USD/JPY drifting toward 146 at end-2026. We think GBP/USD stays near 1.33-1.34 in 2026.”