Dollar Gains Ground for Second Consecutive Week as Rate Cut Expectations Diminish

The dollar is poised to achieve gains for the second consecutive week, Friday, as indications of the strength of the American economy and caution from central bank officials regarding interest rate cuts led to a decline in the market’s expectations of a rapid and sharp reduction.

The Australian dollar is expected to achieve gains of 1.6 percent for the week, and the New Zealand dollar is expected to achieve gains of 2.3 percent, which are the largest since November and July, respectively.

Market participants are expected to have a 57 percent chance of interest rate cuts in March, down from 75 percent the previous week.

Richard Franulovich, Head of Foreign Exchange at Westpac, said, “The strong message conveyed by US activity data and central bank officials is that the markets are strongly considering interest rate cuts in 2024, both in terms of timing and percentage.”

He added, “This has led, in addition to a new bout of disruption in China’s real estate and financial markets, to the return of the dollar’s strength.”

The dollar index rose 0.9 percent to 103.4 points during the week, with the yen being the biggest loser, having declined by 5 percent so far this year, as data and the devastating earthquake shook confidence in the Bank of Japan’s imminent interest rate hike.

The yen fell around 0.2 percent to 148.44 against the dollar, while the euro fell 0.6 percent during the week to 1.0884 dollars. The pound sterling fell 0.4 percent to 1.2705 dollars. The Australian dollar received some support from stabilizing iron ore prices, rising 0.1 percent to 0.6578 dollars, while the New Zealand dollar stabilized at 0.6099 dollars.

Data released on Thursday showed the strength of the US labor market, with weekly jobless claims dropping to nearly their lowest level in a year and a half, leading to a decline in market bets on interest rate cuts. Two-year Treasury bond yields rose 22 basis points this week to 4.3587 percent.

Earlier data showed that retail sales exceeded expectations in December.

Christopher Waller, a member of the US Federal Reserve’s Board of Governors, said on Tuesday that the strength of the US economy gives policymakers the flexibility to move “cautiously and slowly,” which market participants interpreted as an indication that interest rate cuts will not be swift.

Similar statements from officials at European central banks have also led to a decline in expectations of interest rate cuts in Europe, mitigating the euro’s decline against the dollar.