Dollar hits new highs as Fed rate cut bets recede

by Jonathan Adams
Dollar wobbles

The yen as well as the Australian and New Zealand dollars meanwhile dropped to two-month lows, while the euro similarly bottomed at an over one-month low of $1.07675 against a stronger greenback

The dollar rose to an eight-week high against its major rivals on Monday as traders lowered bets for aggressive rate cuts by the Fed this year in view of a still-strong U.S. economy.

The yen as well as the Australian and New Zealand dollars meanwhile dropped to two-month lows, while the euro similarly bottomed at an over one-month low of $1.07675 against a stronger greenback. The dollar index peaked at 104.18, its highest since December.

The Fed repricing has come on the back of Friday’s strong U.S. jobs report that far surpassed market expectations, reinforcing Chair Jerome Powell’s statement at the conclusion of the central bank’s policy meeting last week that a March rate cut was unlikely.

A one-two punch from Jay Powell’s FOMC (Federal Open Market Committee) presser and a very strong nonfarm payrolls report have essentially closed the door on a March rate cut, according to Chris Weston, head of research at Pepperstone.

Traders are pricing in just a 20% probability that the Federal Reserve could begin easing rates in March, as compared to an almost 50% probability a week ago, per the CME FedWatch tool. The odds for a reduction in May have also lengthened. In an interview with the CBS news show “60 Minutes” that aired Sunday night, Powell said the Fed can be “prudent” in deciding when to cut its benchmark interest rate, with a strong economy allowing central bankers time to build confidence inflation will continue to slow.

Fed funds futures now show nearly 137 bps worth of easing priced in for the Fed this year, down from 150 bps at the end of last year. The Japanese yen was last down 0.15% at 148.58 per dollar, having touched a low of 148.82 earlier in the session.

The Aussie slipped 0.33% to $0.6490, while the kiwi shed 0.25% to last trade at $0.6050. Sterling bottomed at $1.2600, its lowest since January 17.

The dollar is likely to hold on to its recent gains, said Carol Kong, a currency strategist at CBA. Treasury yields also jumped on expectations of higher-for-longer U.S. rates, with the two-year yield , which typically reflects near-term interest rate expectations, last up nearly seven basis points at 4.4386%.

The benchmark 10-year yield increased five basis points to 4.0829%. Elsewhere, China’s securities regulator vowed to prevent abnormal market fluctuation, after Chinese stocks slumped to five-year lows, but announced no specific measures.

That did little to help the yuan, with the offshore yuan last slightly lower at 7.2182 per dollar, pressured by a stronger dollar. It had dropped to a more than two-week low of 7.2225 per dollar earlier in the session.

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