Federal Reserve Rate Hikes: Dollar’s Fall Continues

Federal Reserve rate hikes

The U.S. dollar kept falling on Monday, after a big drop last week. This was the biggest drop since July, caused by the Federal Reserve’s less aggressive stance and signs of slowing in U.S. data.

The dollar index was around a 6-1/2 week low of 104.84, after a drop of about 1.4% last week. At the same time, the euro rose 0.2% to a 7-1/2 week high of $1.0756.

Reactions in the Global Market

Global stocks had their best week in a year last week, driven by hopes that the Fed had stopped raising rates. Other factors such as a drop in U.S. jobs data, weaker manufacturing numbers, and a fall in longer-dated Treasury yields also had a negative impact on the dollar. These factors sparked rallies in sterling and the Aussie dollar, and caused the yen to recover from the weaker side of 150 per dollar.

Market analyst Tina Teng at CMC Markets in Auckland commented, “We always say bad news (weak economic data) is good news. So it’s good then there is hope for the Fed and other central banks to stop the rate hike cycle sooner.” She predicted that the dollar would continue to weaken throughout November.

Mixed Views on Market Movements

However, Dane Cekov, senior FX strategist at Nordea, considered last week’s movements an “over-reaction”, describing the jobs data as a “mixed bag”. He suggested that the dollar could weaken in the short-term, but if the euro-dollar rally continues, it would need additional support.

JPMorgan analysts believe that a sustained dollar sell-off would require signs of improvement in the euro zone, China, and other regions, which they described as “still tenuous”. Recent growth and inflation data from the euro zone and manufacturing surveys from China support this view.

Fears of a Recession in the Euro Zone and Future Predictions

Fears of a recession in the euro zone solidified on Monday after a survey revealed an accelerated downturn in business activity last month due to further weakening in the services sector. Adrian Prettejohn, Europe economist at Capital Economics, stated, “Final PMIs released today … are consistent with our forecast that euro-zone GDP will contract again in Q4. They also suggest that price pressures are continuing to ease.”

Futures markets imply an approximately 80% probability that the European Central Bank will cut rates by April and a 90% chance that the Fed has concluded its rate hikes, with an 86% chance that the Fed’s first policy easing would occur as early as June.

Impact on Treasury Yields

Last week, Fed Chair Jerome Powell’s comments about balanced economic risks led to lower Treasury yields, with further declines following the softer U.S. data. The U.S. government also reduced its refinancing estimate for this quarter and announced smaller-than-expected increases in long-dated debt auctions.

Yields on 2-year notes have dropped 25 basis points in roughly two weeks, while 10-year yields were near a five-week low and last stood at 4.593%. The front end of the curve remains deeply inverted.

Other Currency Movements

The Japanese yen slipped 0.2% to 149.62.5 per dollar. Nordea’s Cekov suggested that the yen would likely need to be around the 155 per dollar area for Japanese authorities to consider intervention or to talk the currency up.

Sterling rose 0.4% to $1.2425. Britain’s GDP data for the third quarter is due this week and, while the pound rallied strongly last week in a market that is heavily short the currency, it is still down about 5.5% since a July peak.

In the world of cryptocurrencies, bitcoin was slightly higher at $35,179. The risky asset has recently been supported by the expected end of central bank policy tightening cycles. (Source)