Dollar index at three-month high, testing top of recent range

The yen was at 154.1 per dollar, languishing near an 8-1/2-month low, pressured by wide interest rate differentials.

 The dollar hovered near a three-month high on Monday ahead of economic data this week that will offer only vague clues about the health of the U.S. economy and could reinforce the Federal Reserve’s cautious stance.

The Fed lowered interest rates by 25 basis points last week, as expected, but Chair Jerome Powell signalled that may be the central bank’s last cut this year, citing the risk of making additional moves without a more robust picture of the economy.

Were it not for the ongoing U.S. government shutdown, data releases scheduled for this week, including U.S. non-farm payrolls, would have helped with that picture.

However, with government releases likely to be delayed again, investors will be left with ADP employment data and ISM PMIs, though it seems unlikely these will move the dial significantly.

A number of Fed bank presidents on Friday aired their discomfort with the decision to ease policy, and traders are now pricing in a roughly 68% chance of a 25 bp cut in December, having seen such a move as likely ahead of last week’s meeting.

The yen was at 154.1 per dollar, languishing near an 8-1/2-month low, pressured by wide interest rate differentials.

Meanwhile the euro was down 0.16% at $1.1513, its lowest in three months, and the pound was 0.4% lower at $1.3118.

That left the dollar index, which measures the currency against a basket of six other majors, up 0.16% at 99.89, its highest since August 1.

The index has traded in a tight range of between around 96 and 100 over the last six months.

“All eyes are on whether it can break out of that range, and if the rebound has legs,” said Lee Hardman, senior currency analyst at MUFG, adding that the main driver of the stronger dollar was the hawkish repricing of Fed expectations.

The pound and the yen face their own pressures.

Even though Bank of Japan Governor Kazuo Ueda last week sent the strongest signal yet that a rate hike was possible as soon as December, markets remained underwhelmed by the central bank’s gradual approach, particularly given that the Fed has turned more hawkish.

That has piled pressure on the yen, prompting jawboning from Japanese authorities to stem the currency’s slide.

The yen is approaching levels at which Japanese authorities intervened in markets in 2022 and 2024 to support the currency.

“The yen could start to see more support as markets get nervous about intervention as we get close to those levels, though I don’t think it’s enough to change things on its own,” said Hardman.

The yen was also pinned near last week’s record low against the euro, last trading at 177.4.

Sterling has softened as market expectations of another Bank of England rate cut this year increased after softer-than-expected inflation data released last month.

The BoE meets this week, with some analysts predicting a 25 basis point cut, though market pricing only reflects a one in three chance of this occurring.

The Aussie inched up 0.1% to $0.6554, supported by expectations that the Reserve Bank of Australia will hold rates on Tuesday, following an uncomfortably high reading of core inflation, while the dollar was up 0.27% to 0.8067 Swiss francs, its highest in over three weeks. 

© ZAWYA