In a tumultuous trading session on Tuesday, the U.S. dollar witnessed a surge as investors recalibrated their expectations for a March rate cut from the U.S. Federal Reserve, a sentiment influenced, in part, by remarks from Board Governor Christopher Waller. The market, which had previously priced in an 81% chance of a rate cut of at least 25 basis points in March, revised its expectations to 66.9%, according to CME’s FedWatch Tool.
The dollar index, a measure of the greenback against a basket of major currencies, displayed a robust performance, registering a 0.73% gain at 103.38. The index reached its highest level since December 13, reflecting a significant one-day percentage gain not seen since January 2. This upward momentum was accentuated by Waller’s comments emphasizing the proximity of the U.S. to the Federal Reserve’s 2% inflation target.
Christopher Waller, recognized as a hawk within the Federal Reserve, indicated that while the U.S. is nearing the inflation goal, caution should prevail before rushing into benchmark interest rate cuts. His stance aligns with a methodical and careful approach to rate adjustments, contrasting with the pace seen in the past. Analysts, such as Marc Chandler, Chief Market Strategist at Bannockburn Global Forex, noted that Waller’s confirmation of reaching a peak contributed to the dollar’s upward trajectory.
Goldman Sachs, while maintaining its view of the Fed delivering a series of three consecutive cuts beginning in March, acknowledged that Waller’s comments increased the risk of a delayed rate cut or a preference for a quarterly cutting strategy.
Despite the overall strength of the dollar during the session, a momentary dip occurred following a lackluster report on the manufacturing sector in the New York region, showcasing the currency’s sensitivity to economic indicators.
The euro, as a major counterpart to the dollar, experienced a decline of 0.72% to $1.0869, marking its most substantial one-day percentage drop in two weeks. This decline was influenced by comments from European Central Bank policymaker Joachim Nagel, who sought to temper expectations of imminent rate cuts. Several ECB policymakers maintained a degree of uncertainty about the timing of policy adjustments, emphasizing the likelihood of rate decreases later in the year.
The dollar’s strength was further bolstered by an increase in U.S. bond yields on Tuesday, following a holiday on Monday. The 10-year U.S. Treasury yield rose by 11.9 basis points to 4.0695%. An ECB survey revealing a decline in consumer expectations of euro zone inflation added to the supportive backdrop for the dollar.
Sterling, on the other hand, faced headwinds, depreciating by 0.79% to $1.262. This decline was triggered by data showing a sharp slowdown in British wage growth during the three months through November, fostering expectations of significant rate cuts by the Bank of England in the coming year.
Against the Japanese yen, the dollar exhibited strength, rising by 1.04% to 147.26, reaching its highest level since December 7. Data indicating a flat wholesale price index in Japan for December contributed to the yen’s weakness and alleviated pressure on the Bank of Japan to reconsider its monetary stimulus measures. In the realm of cryptocurrencies, bitcoin experienced a modest increase of 1.39% to $43,272. The cryptocurrency had witnessed a 6% decline following the Securities and Exchange Commission’s approval of 11 applications for the first U.S.-listed exchange-traded funds (ETFs) tracking bitcoin. The evolving dynamics in traditional and digital financial markets underscore the intricate interplay of factors shaping the broader economic landscape.
