- Dollar Steadies as Softer US Data Pushes Next Fed Rate Rise Towards December
The US dollar steadied on Wednesday after recent losses as investors awaited the Federal Reserve’s meeting minutes and a series of policymaker speeches for clearer guidance on whether America’s central bank will raise interest rates again this year.
The dollar index, which measures the greenback against a basket of major currencies, edged 0.03 per cent higher to 101.94, after declining 0.27 per cent during the previous session.
The modest movement concealed a significant shift in interest-rate expectations. Financial markets now assign only a 20.5 per cent probability to an increase of at least 25 basis points at the Fed’s October meeting, down from about 51 per cent a week earlier.
Investors nevertheless see an 84.5 per cent probability of an increase in December, suggesting that markets have postponed rather than abandoned expectations of further monetary tightening.
The repricing followed weaker-than-expected US personal consumption expenditure inflation and employment figures. The softer data reduced pressure on the Fed to raise borrowing costs immediately after its September 15-16 meeting, when policymakers increased rates to contain inflation.
“There seems to be a little bit less urgency on the Fed to hike rates,” said Gavin Friend, senior markets strategist at National Australia Bank.
The September meeting minutes, alongside speeches by Fed officials Christopher Waller, Neel Kashkari and Alberto Musalem, could show whether policymakers broadly favour waiting until December or remain divided over the timing of another increase.
Kansas City Fed President Jeff Schmid argued on Tuesday that policy rates still needed to rise further to bring inflation under control, even as elevated long-term borrowing costs were beginning to restrain sections of the economy.
Commonwealth Bank of Australia currency strategist Samara Hammoud said markets had become unusually sensitive to individual economic releases and policymaker comments because of limited forward guidance from Fed chair Kevin Warsh. The bank expects the Fed to wait until December before raising rates again.
The dollar’s weakness was also influenced by developments in Europe, where the easing of pressure in French government bond markets helped the euro record its strongest one-day advance in seven weeks on Tuesday.
French bond yields declined after Marine Le Pen, the frontrunner in the country’s 2027 presidential contest, increased her proposed public spending reductions to €140bn from the €125bn previously planned.
The announcement offered temporary reassurance to investors concerned about France’s budget deficit and public debt. The euro subsequently eased 0.08 per cent to $1.1249 during Wednesday’s session after its sharp advance a day earlier.
However, the recovery does not remove the underlying fiscal risks confronting European markets. Political disagreements over France’s budget and the calling of a snap election in Spain continue to leave sovereign debt vulnerable to abrupt repricing.
The episode underlines how currency markets are being driven by two competing forces: expectations about central-bank interest rates and growing anxiety over governments’ ability to manage their finances.
The Japanese yen weakened 0.19 per cent to ¥158.43 against the dollar, despite comments from new Bank of Japan policymaker Ayano Sato supporting interest-rate increases in several stages.
The central bank may signal that underlying inflation has broadly reached its 2 per cent target, potentially preparing the ground for another increase in Japanese rates.
Yet the yen’s continued weakness indicates that investors remain unconvinced that the Bank of Japan will tighten policy rapidly enough to close the yield gap with the US.
Sterling declined 0.08 per cent to $1.3262, while the Australian dollar slipped 0.04 per cent to $0.6979. New Zealand’s dollar fell 0.07 per cent to $0.5617.
Bitcoin decreased 0.22 per cent to $85,438.59, while ether slipped 0.12 per cent to $2,695.22.
For emerging and frontier economies, the Fed’s next decision will have consequences extending beyond the dollar.
A delay in additional US tightening could reduce some of the pressure on currencies such as the Ghana cedi by limiting the increase in dollar-denominated yields and improving the relative attraction of local-currency assets.
But a December increase remains heavily priced into financial markets. The temporary retreat in the dollar should therefore not be interpreted as the beginning of a sustained easing cycle.
Higher US rates could still strengthen the dollar, raise external financing costs and encourage capital to move away from developing economies. Commodity-importing countries would face an additional risk if a stronger dollar coincided with elevated energy prices.
The immediate question is whether the Fed’s minutes validate the market’s more cautious expectations. If policymakers emphasise weakening employment and easing inflation, the dollar could remain under pressure. A renewed focus on persistent inflation, however, could quickly revive expectations of an October increase.
For now, the dollar is caught between softer economic data and a central bank that has not declared victory over inflation. The currency’s next direction may depend less on Wednesday’s small market moves than on how clearly the Fed explains the conditions for its next rate rise.
