US dollar dips against euro, gains on yen as Fed policy stays in focus

THE US dollar dipped against the euro on Friday (Nov 10) but gained against the yen as investors evaluated comments by Federal Reserve chair Jerome Powell that the central bank could hike rates again if inflation remains above its target.

The Japanese currency also remained on watch for possible intervention as it holds near a one-year low against the greenback.

Powell and other Fed officials said last Thursday that they are still not sure that interest rates are high enough to finish the battle with inflation, with Powell saying that the Fed may get further help in taming price increases from improvements in the supply of goods, services and labour.

Markets are looking for “the ray of sunshine” that the Fed is done hiking rates, even though Powell since Jackson Hole has been clear that it will depend on data as it comes in, said Lou Brien, market strategist at DRW Trading in Chicago.

“Yesterday was another one of those occasions where Powell reminded that we have to take care of inflation, we don’t know that we’ve done enough yet - we will know as the data unfolds but we might have to do more if the data doesn’t unfold as we anticipate,” he said.

Consumer price inflation and retail sales data due this week are expected to offer the next clues on whether further rate increases are likely.

The US dollar briefly gained on Friday after a survey showed that US consumer sentiment fell for a fourth straight month in November, and households’ expectations for inflation rose again, with their medium-term outlook for price pressures shooting to the highest in more than a dozen years.

The dollar index was last down 0.06 per cent on the day at 105.85.

The US dollar tumbled the prior week after Powell was interpreted as striking a dovish tone after the Fed’s two-day meeting, with softer-then-expected jobs data on Friday adding to a belief that the Fed has finished hiking interest rates.

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Fed funds futures traders are pricing in a 22 per cent chance of an additional hike by January, according to the CME Group’s FedWatch Tool.

Some analysts, however, see the market as too complacent about the risk that the Fed is not yet done. “Markets continue to underestimate the persistence of inflation globally and that in turn leads them to underestimate the likelihood of further monetary tightening. Right now, market pricing is leaning heavily to rate cuts by mid-2024 and we suspect this will have to be rethought in the coming weeks,” Win Thin, global head of currency strategy at Brown Brothers Harriman said in a note on Friday.

Fed Bank of San Francisco President Mary Daly said on Friday that she is not ready to say yet whether the central bank is done raising its interest rate target to get inflation back to 2 per cent.

The US dollar also spiked on Thursday in line with Treasury yields after the US Treasury Department saw weak demand for a US$24 billion 30-year bond auction.

It was not clear whether demand for the debt was impacted by a ransomware attack on the Industrial and Commercial Bank of China’s (ICBC) US arm, which has disrupted some trades in the U.S. Treasury market.

The euro gained 0.10 per cent to US$1.0679. European Central Bank interest rates kept at a record high for long enough could return inflation to the bank’s 2 per cent target, ECB President Christine Lagarde said on Friday.

Against the Japanese yen, the US dollar gained 0.16 per cent to 151.59 yen, the highest since Nov 1. Traders remained on alert for potential intervention in the Japanese currency, which is near a one-year low of 151.74 reached in the prior week. The yen is on track for its worst week since August, with the dollar gaining 1.48 per cent against the currency last week.

The euro also hit a 15-year high of 161.95 yen on Friday.

The Australian dollar fell to US$0.63395, the lowest since Nov 1. It has tumbled since the Reserve Bank of Australia on Tuesday raised interest rates to a 12-year high but played down the probability of further increases.

Bitcoin, the world’s largest cryptocurrency, was at US$37,167, having peaked at US$37,978 in the previous session, its highest level since May 2022.

Prices of the digital assets have surged after speculation of an imminent approval of BlackRock’s spot bitcoin ETF. A spot crypto ETF would make the sector “more accessible for institutional investors to enter the crypto space, likely boosting demand and subsequently prices,” said Carl Szantyr, managing partner of digital asset hedge fund Blockstone Capital.