Dollar hits a two-month low on rate cut hopes

by Jonathan Adams

The dollar index in Asia trade dropped to 103.64, its weakest level since September 1, extending its around 2 per cent drop from last week

The dollar slipped to a two-month low on Monday, extending its downturn from last week as traders reaffirmed their belief that U.S. rates have peaked and turned their attention to when the Fed could begin cutting rates.

The yuan hit three-month highs in both the onshore and offshore markets, propped up by China’s central bank, while the Australian dollar reached a three-month high against the declining greenback.

The dollar index in Asia trade dropped to 103.64, its weakest level since September 1, extending its around 2 per cent drop from last week – the steepest weekly decline since July.

Markets have priced out the risk of further rate hikes from the Federal Reserve after several weaker-than-expected U.S. economic indicators last week, especially following an inflation figure that came in below estimates.

Focus now turns to how soon the first rate cuts could come, with futures pricing in a 30 per cent probability that the Fed could begin reducing rates as early as next March, as per the CME FedWatch tool.

Market pricing for FOMC (Federal Open Market Committee) policy is likely to remain pretty steady, so the dollar should have very few catalysts to move it around this week, said Carol Kong, a currency strategist at CBA. If we do see risk appetite improve again, then the dollar can definitely drop further.

Also due this week are minutes of the Fed’s latest meeting, which will offer some indications about policymakers’ thinking as they held rates steady for a second time earlier this month.

(The) FOMC minutes may be framed as a ‘Fed pivot’, thereby underscoring risk-on rallies favouring softer U.S. Treasury yields and U.S. dollar, besides buying in risk assets, said Vishnu Varathan, head of economics and strategy at Mizuho Bank.

The upshot is that the FOMC minutes may overstate incremental dovish shifts and possibility of the Fed’s intended pivot signals.

The drop in the greenback brought some respite for the Japanese yen, which was on the stronger side of 150 per dollar and last added 0.4 per cent to 149 per dollar.

In Asia, China on Monday left its benchmark lending rates unchanged at a monthly fixing, according to expectations, as a weaker yuan continued to limit further monetary easing and policymakers waited to see the impact of previous stimulus on credit demand.

The yuan found some support after the country’s central bank set the currency mid-point at its strongest level since August 11.

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