US dollar rallies as traders reduce bets on deeper Fed rate cut

Item 1 of 2 U.S. dollar banknotes are seen in this illustration taken on March 10, 2023. REUTERS/Dado Ruvic/Illustration

[1/2]NEW YORK, Sept 9 (Reuters) – The dollar rallied against the yen and other major currencies on Monday after losing ground last week as investors looked forward to key U.S. inflation data and scaled back expectations for a Federal Reserve interest rate cut next week.

The greenback rose for the first time in five sessions against the Japanese currency, while it gained for a second consecutive day against the euro.

U.S. interest rate futures have fully priced in a 25-basis-point rate cut at the Fed’s Sept. 17-18 policy meeting, with a roughly 29% chance of a deeper, half-percentage-point cut, according to LSEG calculations. By Friday, prices for a deeper cut had climbed to as much as 50%.

For 2024, traders expect an easing of 113 bp, compared to around 100 bp previously.

“I think the Fed will cut rates by 25 basis points next week. There could be a massive 50-point rate hike in November depending on what inflation data comes out. But the latest growth data shows that the economy is doing well: it’s clearly slowing and moderating,” said Amo Sahota, managing director at Klarity FX in San Francisco.

“It would be too harsh to say that the economy is collapsing or in recession… Is the Fed behind schedule? Potentially yes, but it can do that with a series of 25 basis point rate cuts. At some point, a 50 basis point cut would help the Fed get ahead.”

In afternoon trading, the dollar gained 0.4% to 142.84 yen. Monday's rally was a welcome respite for the dollar after a tough month so far. In September, the dollar lost 2.1%. Last week, the U.S. currency fell 2.7% against the yen.

Against the euro, the dollar gained, with the single European currency down 0.4% to $1.1041. The euro's fall pushed the dollar index, a gauge of the greenback's value against six major currencies, up 0.4% to $101.56.

Reuters ChartsInflation Data

Attention now turns to the release of the U.S. consumer price index (CPI) on Wednesday, even though the Fed has made clear that employment has become a bigger priority than inflation. The headline CPI is expected to have risen 0.2 percent month-on-month in August, the same as the previous month, according to a Reuters poll.

But on an annual basis, it is expected to increase by 2.6%, compared to 2.9% in July.

Friday's release of the U.S. jobs report for August provided no clarity on whether the Fed would deliver a steady 25 basis point rate cut or an oversized 50 basis point cut next week.

Fed officials signaled Friday that they were ready to begin a series of rate cuts, noting a cooling in the labor market that could accelerate and become something more worrisome in the absence of lower borrowing costs.

The European Central Bank, meanwhile, will meet on Thursday and is widely expected to cut its main interest rate by 25 basis points to 3.50%, after kicking off its rate-cutting cycle in June with a quarter-percentage-point easing.

According to LSEG calculations, traders estimated the probability of a similar move in December at 48%.

In other currency pairs, the dollar gained 0.6% against the Swiss franc to 0.8482 francs. It hit its lowest level in eight months against the franc on Friday.

The pound fell to $1.3068, its lowest level in more than two weeks, ahead of a series of economic data this week that could shape expectations for the Bank of England's monetary policy measures this year. The pound was down 0.4% at $1.3075.

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Reporting by Gertrude Chavez-Dreyfuss; additional reporting by Sruthi Shankar in London and Rae Wee in Singapore; editing by Christina Fincher, Mark Potter and Paul Simao

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