US dollar heads for weekly gain as rate cut optimism cools
THE US dollar was on track to rise for the week on Friday (Jan 19), adding to solid gains so far this year, as the US economy and pushback from central bankers has caused traders to dial down expectations of swift falls in interest rates.
The euro has fallen 0.6 per cent this week, helping push the US dollar index to a 0.9 per cent gain, taking its increase this year to 1.9 per cent.
Japan’s yen has been the biggest loser: it is now down around 5 per cent for the year so far as tepid economic data and a deadly earthquake have sapped confidence that the Bank of Japan is about to hike rates.
“The thumping message from US activity data and central bankers is that markets are too aggressively priced for rate cuts in 2024,” said Westpac’s head of foreign exchange strategy Richard Franulovich.
“That, and a fresh bout of turbulence across China’s property and financial markets has the dollar returning to form.”
On Friday, the euro was up 0.1 per cent at US$1.0887, while the US dollar index was little changed at 103.33.
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The yen was also little changed at 148.02 to the US dollar, having fallen after data showed Japan’s core inflation rate slowed to 2.3 per cent in the year to December. That was its lowest annual pace since June 2022, taking the pressure off policymakers to make swift moves.
“We’re kind of stuck in this range here in euro,” said Erik Nelson, macro strategist at Wells Fargo. “As much as has happened, the euro has barely moved this year.”
Nelson said investors were waiting for data on the Federal Reserve’s preferred measure of inflation to be released on Friday next week.
Britain’s pound was 0.17 per cent lower at US$1.2683. Data on Friday showed UK retail sales slumped by the most in three years in December.
Investors now expect 140 bps of interest rate cuts from the Fed this year, down from 165 bps a week earlier. They also see a roughly 54 per cent chance the first cut comes in March, from 77 per cent a week ago.
US labour market data released on Thursday was strong, with weekly jobless claims dropping to their lowest level in nearly 1½ years, adding to the pressure on market rate-cut wagers.
Fed official Christopher Waller said on Tuesday the US economy’s strength gives policymakers flexibility to move “carefully and slowly”, which traders took as pushing back at pricing for a speedy fall in rates.
Two-year Treasury yields, which track short-term interest rate expectations, are up 22 basis points this week to 4.359 per cent.
Bitcoin hit a five-week low at US$40,484 overnight as traders have taken profits following the US approval of spot Bitcoin exchange-traded funds.
Australia’s dollar, which tends to rise when investors are taking more risk in global markets, was up 0.4 per cent at US$0.6599, although it remains around 3.2 per cent lower for the year. REUTERS
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