Dollar slips as traders focus on Fed cut bets, risk sentiment improves

Markets pricing in Fed rate cuts for both October and December.

The U.S. dollar slipped against a basket of peers on Wednesday after comments from Federal Reserve Chair Jerome Powell bolstered bets on a series of rate cuts in coming months, while a broader improvement in risk sentiment took the shine off the greenback.

Francesco Pesole, FX strategist at ING said an improvement in risk sentiment on Tuesday and overnight was weighing on the dollar, which had been benefitting from the reverse.

“Earnings were pretty good (on Tuesday) and the S&P opened low, but throughout the day actually had a pretty good session. I think the dollar was getting some decent flows from the souring in risk sentiment so the improvement actually seemed to weaken it,” said Pesole.

He also said increased optimism in European markets over France’s political situation was helping the euro. The euro added 0.17% to $1.16265 after gaining 0.3% in the previous session, supported by the French government’s proposal to suspend landmark pension reforms.

The dollar index, which measures the U.S. currency against six major peers, fell 0.2% to 98.843 as of 1104 GMT, extending a 0.2% decline from the prior session. Meanwhile the yen and Australian dollar were standout performers as each continued to recover from steep drops versus the greenback last week. Some analysts also pointed to a tailwind from Beijing’s decision to set the official yuan fixing on the stronger side of the closely watched 7.1 per dollar line for the first time since last November. The risk-sensitive Aussie gained despite a simmering tariff spat between Beijing and Washington. The yen rallied even as uncertainty deepened over who will become Japan’s next premier, with local media reporting that a parliamentary vote mooted for next Tuesday may be delayed amid political wrangling. Sterling gained 0.33% to $1.3363, bouncing back from declines on Tuesday, when official data showed a cooling in wage growth. Britain’s finance minister Rachel Reeves said she was looking at both tax rises and spending cuts for her budget on November 26, confirming widely held expectations given her pledges about balancing the country’s books. Stocks were shining in Europe on Wednesday, with a spate of positive earnings from major names lifting the STOXX 600 0.7%. “Earnings – whether they are in Europe or in the U.S. – if they are good, they tend to take some shine off the dollar,” said Pesole.

FED LEAVES DOOR OPEN ON CUTS Also weighing on the dollar was the dovish tone struck by Fed chair Powell, who in a speech on Tuesday left the door open to rate cuts by saying the U.S. labour market remained mired in low-hiring, low-firing doldrums. He said the absence of official economic data due to the government shutdown has not prevented policymakers from being able to assess the economic outlook, at least for now. Markets are currently priced for a quarter-point cut at the October 28-29 Fed gathering and another at the following meeting in December, followed by three more cuts next year, according to LSEG data. “At this point, the market is pretty much trading ‘Goldilocks’,” said DBS analysts, with risk assets supported by a strong economy along with easy monetary conditions. “Trade tensions, the government shutdown and inflation worries … are all being set aside for now.” U.S. Trade Representative Jamieson Greer helped to calm some nerves on Tuesday when he told CNBC that there was still a plan for President Donald Trump to meet with Chinese leader Xi Jinping. The dollar slid 0.3% to 151.37 yen, and earlier dipped to 150.9 yen. It fell 0.1% to 7.123 yuan in offshore trading .

The Aussie climbed 0.5% to $0.652, after falling 0.5% a day earlier, when it touched the lowest since August 22 at $0.64405. However, the New Zealand dollar edged up only 0.2% to $0.5729, after dipping to a six-month low of $0.56839 on Tuesday. Reserve Bank of New Zealand Chief Economist Paul Conway told Bloomberg TV on Wednesday that policymakers were open to further rate cuts if necessary, following a jumbo reduction last week.

© ZAWYA