Dollar lower as traders bet U.S. Fed done with rate hikes

by Jonathan Adams

The dollar index was at 106.22, not far from the one-week low of 105.80 it reached on Thursday

The dollar stayed on the back foot on Friday and was on course for a weekly drop against a basket of currencies as traders bet that the U.S. Fed was most likely done with rate hikes, lifting risk sentiment.

The dollar index, which measures the U.S. currency against six rivals, was at 106.22, not far from the one-week low of 105.80 it reached on Thursday. The index is on course to a 0.3% decline for the week, just its third week of losses since July.

Markets are now pricing in a less than 20% possibility of a rate hike in December compared to 39% a month back, according to CME FedWatch tool, in the wake of the U.S. central bank’s holding interest rates steady on Wednesday. The Fed, however, left the door open to a further rise in borrowing costs in a nod to the economy’s resilience.

Data on Thursday showed the number of Americans filing new claims for unemployment benefits rose moderately last week as the labour market continued to show few signs of a significant slowdown.

The dataflow was supportive for the notion of a soft landing and the end of the U.S. hiking cycle being nearer, said Tapas Strickland, head of market economics at NAB.

Investor focus will now be on October non-farm payrolls data later during the day, with consensus at 180,000 jobs, with a weaker result likely to put further pressure on the dollar.

Analysts said any pullback in the dollar will probably be temporary, pointing to the strength in U.S. economy compared with the rest of the world.

Global economy is going to slow down while the U.S. economy seems to be more resilient. So Fed vs. ECB, you might see more divergence and then the differential in real rates, said Flavio Carpenzano, Investment Director for fixed income at Capital Group. This is the reason why over the next few months, it is hard to see a big catalyst for the dollar to weaken.

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