NEW YORK: The US dollar rebounded on Wednesday due to month-end buying after recent declines that pushed it to its weakest in more than a year, as traders awaited economic data that could determine the pace of the Federal Reserve’s imminent easing cycle.
Sharp bouts of volatility hit the foreign exchange markets this month as worries around a potential US recession and hawkish signals from the Bank of Japan (BOJ) hammered the dollar and sent other major currencies soaring.
The dollar index, which measures the greenback against a basket of six major currencies, rose 0.4% to 100.99, on pace for its largest daily percentage gain since mid-June.
For the month of August, however, the greenback has fallen 3.4%, its worst monthly decline since November 2023. It reached a 13-month low of 100.51 in the previous session, weighed down by a recent sharp re-evaluation of expectations for Fed rate cuts.
“The dollar’s rise today is warranted given the move lower in the dollar this month. We have seen a sharp depreciation in the dollar, being down 5% in the second half of 2024,” said Boris Kovacevic, global macro strategist at Convera in Vienna, Austria.
“Looking at the flows, I would attribute the dollar bid today to the usual month-end flows, especially given the fall in the dollar this month.”
Investors across the board expect the Fed to begin cutting interest rates next month following Chair Jerome Powell’s dovish tilt last week, with the debate now centred on whether or not it will be a super-sized 50-basis point cut, or the standard 25-bp easing.
Current pricing indicated a 35% chance of the larger cut, slightly down from 37% late on Tuesday, according to LSEG calculations. Markets were also pricing in about 105 bps of easing by the end of the year.
“The overall Fed narrative is obviously negative for the dollar and attributed to the expectations of aggressive policy easing by the Fed, rightly or wrongly,” Kovacevic said.
Traders also awaited earnings from artificial intelligence (AI) chip giant Nvidia, which has sparked a frenzy on Wall Street and beyond in recent years. The dollar has also been sensitive to moves in equity markets this year
A preliminary estimate for US gross domestic product in the second quarter is due later this week, along with the core personal consumption expenditures (PCE) index, the Fed’s preferred inflation measure.
But with attention shifting from inflation to the strength of the economy, the importance of this week’s PCE data is “debatable”, said Matt Simpson, senior market analyst at City Index:
“It will require a strong upside surprise to dispel expectations of multiple Fed cuts.”
But given that markets have been pricing in easing from September for weeks now, downside momentum on the dollar appears to be waning, with support built up around 100.18/30 in the dollar index, Simpson said.
Against the yen, the dollar rose 0.3% to 144.45 yen, moving away from Monday’s three-week low.
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