US dollar gains as oil climbs and investors focus on the Fed
THE greenback edged higher on Wednesday (Oct 7), buoyed by rising oil prices, while investors awaited Federal Reserve meeting minutes and remarks from policymakers for signals on a potential rate hike.
The euro gave back some of its gains in the prior session when French bonds rallied after the front-runner in next spring’s presidential election outlined plans to cut spending. The yen weakened even after a dovish Bank of Japan (BOJ) board member said she would support interest-rate increases.
Later on Wednesday, the US central bank is due to release minutes of its September policy meeting, when it raised interest rates for the first time since 2023 to contend with inflation.
Mood is less hawkish?
Comments from Fed policymakers have come across as less hawkish, following lower-than-expected personal consumption expenditure data and jobs figures last week.
Dominic Bunning, head of Group of 10 FX strategy at Nomura, said: “We’ve been able to have that long-dollar view on for a few weeks now. It’s worked quite nicely. But I think there’s an element of momentum starting to slow here.”
He added that higher oil prices were lending the dollar short-term support.
“If we get any sign of improvement in the Middle East (situation) going into the midterms, or further signs that US data is softening ... that could also be something that weighs on quite elevated rate expectations in the year ahead.”
The dollar index, which measures the US dollar against a basket of currencies, rose 0.3 per cent to 102.13, recovering from a 0.27 per cent slide on Tuesday. The euro fell 0.4 per cent to US$1.1216.
The Japanese yen weakened 0.13 per cent to 158.31 per dollar, and the sterling lost 0.21 per cent to US$1.3248.
Brent futures rose back above US$100 a barrel on concerns of supply disruptions from a storm threatening US oil-producing regions and attacks by Yemen’s Iran-aligned Houthis on Aden International Airport.
To end a war that has roiled energy markets and stoked inflation for eight months, Iran must make a meaningful reduction in its nuclear enrichment capacity, US Vice-President JD Vance told Reuters.
Bond yields around the world have climbed in recent weeks due to expectations of central bank rate hikes, as well as concerns about government finances.
French debt is under growing pressure, as politicians struggle to curb the budgetary deficit ahead of a divisive election in 2027. The calling of a snap election in Spain added to the stress on the euro.
But the euro rallied sharply on Tuesday after far-right French presidential candidate Marine Le Pen raised her target for spending cuts to 140 billion euros ($158 billion) from 125 billion euros in savings originally planned if she wins power in 2027.
France’s economic situation is serious, but the country does not need help at this stage from the European Central Bank, Bank of France head Emmanuel Moulin said.
The BOJ’s new policymaker Ayano Sato told Kyodo news agency she supports the idea of raising interest rates in several stages. The BOJ may signal in October that underlying inflation has roughly hit its 2 per cent target, three people familiar with its thinking said, highlighting its readiness to raise interest rates again.
October Fed hike expectations retreat
Expectations for a Fed rate hike later in October have retreated but markets still anticipate more increases later in the year and next year.
In contrast to the call for patience from some Fed officials, Kansas City Fed president Jeff Schmid said on Tuesday that the central bank needs to raise its policy rate further to lower inflation, even if higher long-term yields are weighing on activity in some parts of the economy.
The chance of a hike of at least 25 basis points in October stands at 21.6 per cent, from about 51 per cent a week ago, said CME FedWatch, but markets are pricing in a 68.6 per cent chance of a hike at the December meeting.
In a report, Commonwealth Bank of Australia currency strategist Samara Hammoud said: “With little forward guidance from chair (Kevin) Warsh, markets have reacted sharply to each US data release and policymaker speech.
“We expect the Fed to wait until December before hiking again.”
Fed officials Christopher Waller, Neel Kashkari and Alberto Musalem are all due to speak later on Wednesday. The central bank is scheduled to release consumer credit data, which is expected to show a decrease to US$15 billion in August from US$18.06 billion in July.
The Australian dollar weakened 0.21 per cent versus the US dollar to US$0.6969, while New Zealand dollar sank 0.24 per cent to US$0.5609. REUTERS
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