© Reuters. US dollar bills are shown in this illustration taken on July 17, 2022. REUTERS/Dado Rovik/Illustration/File
Written by Ankur Banerjee
SINGAPORE (Reuters) – The dollar rose on Tuesday as investors scaled back bets on near-term cuts in interest rates by the Federal Reserve following hawkish comments from European Central Bank officials, while fears of further attacks weighed on… Ships in the Red Sea are at risk. Feelings.
Against a basket of currencies, the dollar rose 0.253% to 102.90, after rising 0.2% overnight in quiet trading during a public holiday in the United States on Monday.
The euro fell 0.3 percent to $1.09185, heading towards the largest percentage decline in one day in two weeks. The pound sterling recorded in its latest transactions $1.2681, down 0.36% during the day, moving away from the highest level in nearly five months at $1.2825, which it recorded in late December.
Comments from European Central Bank officials opposing early interest rate cuts have cast a pall over the outlook for interest rates globally. “It is too early to talk about cuts, inflation is too high,” European Central Bank Governor Joachim Nagel said on Monday, adding that the mistake of cutting interest rates too early should be avoided.
Money markets are pricing in 145 basis points of cuts to the ECB’s deposit rate this year, likely starting in April.
“The ECB’s hawkish comments last night have raised concerns that the market’s pricing of the Fed’s interest rate path may also be aggressive,” said Charu Chanana, head of currency strategy at Saxo in Singapore.
“Some safe haven demand is also likely to have an impact on escalating unrest in the Red Sea.”
An official from the Yemeni Houthi movement said on Monday that the group will expand its targets in the Red Sea region to include American ships, pledging to continue attacks after the American and British strikes on its positions in Yemen.
Investors are now bracing for comments from Christopher Waller, Chairman of the Federal Reserve, whose dovish shift in late November helped push markets higher in a sharp year-end rally. Waller is scheduled to speak later Tuesday.
The CME FedWatch tool showed that markets expect a 70% chance of a 25 basis point Fed cut in March, versus 77% the day before, and 63% the week before, highlighting changing expectations for interest rate cuts. .
However, traders expect cuts of more than 160 basis points this year, up from the 140 basis points expected last week.
“We think the market may have gotten ahead of itself in pricing in nearly seven 25 basis point cuts from the Fed this year,” said Hamish Pepper, fixed income and currency strategist at Harbor Asset Management, adding that the dollar is likely to find support. If markets reassess easing. Expectations and push short-term interest rates higher.
“Yes, inflation has fallen more quickly than expected, including core measures, but the labor market still looks very hot and may make it difficult for inflation to return to 2%.”
The yield rose 5.3 basis points to 4.003%, while the yield on two-year US Treasury bonds, which typically move in line with interest rate expectations, rose 7.3 basis points to 4.211%.
A busy week of data lies ahead, with reports on Q4 growth in China and US retail sales due on Wednesday. This week’s jobs and inflation data will be the focus for sterling traders to help adjust their interest rate models.
Markets expect interest rates to be cut by around 120 basis points by the Bank of England in 2024, with the first cut likely in May.
Meanwhile, the yen fell 0.20% to 146.07 against the dollar after data showed that Japan’s wholesale inflation was flat in December compared with a year ago, slowing for the 12th straight month.
The data suggests that the rise in consumer price inflation will moderate in the coming months and ease pressure on the Bank of Japan to phase out its massive stimulus soon.
Expectations of a policy shift from the Bank of Japan have strengthened the yen towards the end of 2023, with the currency rising 5% against the dollar in December. It has since fallen sharply and is down 3% so far in January.
Elsewhere, the Australian dollar fell 0.53% to US$0.6625, while the New Zealand dollar fell 0.46% to US$0.61715.