Dollar slips as US jobless claims boost Fed rate cut bets

NEW YORK: The dollar edged lower on Thursday after US jobless claims rose more than expected last week, indicating a cooling labor market that could prompt the Federal Reserve to cut interest rates in early 2024 and engineer an economic soft landing.

The dollar index, a measure of the US currency against six peers, fell 0.19%, while the euro strengthened 0.34% to $1.0883.

Initial claims for state unemployment benefits rose 13,000 to a seasonally adjusted 231,000 for the week ended Nov. 11, the Labor Department said. Economists polled by Reuters had forecast 220,000 claims for the latest week.

The dollar plunged on Tuesday, registering its biggest single-day decline in a year, after data on consumer prices came in softer than expected and increased the outlook for many that inflation was quickly decelerating to the Fed’s 2% target.

The dollar rebounded a touch on Thursday as the market wrestled with the uncertainty of knowing when the Fed might cut rates that are still restrictive to economic growth.

“Markets are anticipating a rapid pivot towards cuts in 2024 despite the fact that historically we needed a big hit to the economy to deliver that,” said Karl Schamotta, chief market strategist at Corpay in Toronto.

“The challenge here is how we reconcile the view of a soft landing with rapid and significant rate cuts in 2024?” he said. “My view would be that at this point, markets are moving too fast ... and as a result, the US dollar could outperform relative to expectations in early 2024.” Traders remain confident that rates will not go higher, but trimmed the odds for a first reduction by March to less than 1-in-4 from better than 1-in-3 a day earlier, according to the CME Group’s FedWatch Tool.

“While inflation is falling, the economy remains robust, which might even allow the Fed to increase rates if they chose,” said James Kniveton, senior corporate FX dealer at Convera, while noting there doesn’t seem to be appetite for a hike among Fed officials currently.

Deutsche Bank strategist Jim Reid on Thursday cited research from his bank’s economists that showed in the last two years, this is the seventh occasion on which markets have priced in a swift shift by the Fed to rate cuts. On the previous six, those expectations entirely unwound.

“At some point there will be a dovish pivot, and this could be closer than the others to it, but be wary that we’ve now been to this well seven times in two years,” Reid said.

Elsewhere, the Aussie eased 0.31% to $0.6487, while the New Zealand dollar fell 0.32% to $0.6000.

The Australian currency failed to draw support from a strong rebound in employment, as traders keyed in on the fact that gains were mostly in part-time labor, while the jobless rate actually ticked higher.