THE greenback held firm on Tuesday (Dec 17) ahead of an expected interest rate cut in the United States, as traders grow increasingly convinced the Federal Reserve will lower borrowing rates only gradually next year.
The pound was one of the few currencies to rise against the dollar, after data showed British wage growth picked up more strongly than expected in the three months to October, adding to the case that UK rates could take longer to fall than those elsewhere.
The Fed announces its interest rate decision on Wednesday and interest rate futures imply a 94 per cent chance of a cut, even as services-sector activity leapt to a three-year high, according to an S&P Global purchasing managers survey.
The Atlanta Fed’s GDPNow indicator is running at 3.3 per cent for the fourth quarter, and the strength of the economy has been lifting yields and supporting the dollar as traders figure that the neutral setting for rates may be higher than first thought.
“We’re looking for the Fed to indicate more caution over future path of rate cuts. So 25 basis points (bps) is a done deal this week, but the key question is, obviously, what happens next year,” MUFG currency strategist Lee Hardman said.
“We do think there’s a higher likelihood that we will see the Fed skip the next meeting in January to leave rates on hold,” he said.
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US president-elect Donald Trump takes office in January. He has already promised a raft of measures to impose tariffs on imports from the likes of China, Canada and Mexico, as well as the deportation of millions of undocumented migrants – both of which could contribute to a sustained pickup in inflation and prevent the Fed from cutting rates more deeply.
Fed officials’ median long-run interest rate projection was 2.9 per cent in September. Right now, market pricing implies almost no chance of rates being that low by December next year and only a 30 per cent chance of the Fed Funds rate falling below 3.75 per cent by the end of 2025.
The euro, which is heading for a drop of nearly 5 per cent against the dollar this year, eased 0.2 per cent to US$1.04823.
German 10-year bond yields, the benchmark for the eurozone, have risen by around 20 bps this year, compared with a rise of closer to 55 bps for Treasuries, reflecting the expectation that US rates will fall more slowly than those in Europe.
The gap between US and German 10-year yields is 216 basis points, near its widest in five years, having increased by nearly 70 bps in three months.
Rate decisions ahead
Price action across the currency market remained fairly contained on Tuesday, as traders held their fire ahead of the Fed, but also ahead of policy decisions from the Bank of Japan, Bank of England (BOE) and Norges Bank on Thursday, which are expected to leave their respective rates unchanged. Sweden’s Riksbank also meets on Thursday and is expected to cut rates by as much as half a point.
Sterling rose on Tuesday after data showed regular UK pay rose more quickly than expected in the three months to October.
The BOE has frequently cited wage growth as one of the reasons for caution around cutting rates. A survey of British business activity on Monday pointed to rising price pressures.
The pound was last up 0.1 per cent at US$1.2696.
The Canadian dollar, squeezed by falling interest rates and the risk of US tariffs, traded at four-and-a-half year lows around C$1.4277 to the US dollar, after the sudden resignation of finance minister Chrystia Freeland on Monday put an unpopular government under more pressure.
The yen strengthened a touch, leaving the US dollar down 0.15 per cent at 153.89 per dollar, after six straight days of selling, as markets have scaled back the chances of a Japanese rate hike this week in favour of a move in January.
The Australian and New Zealand dollars are pinned near the year’s lows.
The Aussie was last down 0.41 per cent at US$0.6345, while the kiwi fell 0.39 per cent to US$0.576. New Zealand increased its bond issuance forecast for the next few years.
China’s yuan was steady at 7.2892 per dollar, as dour expectations for Chinese economic growth pinned 10-year bond yields near record lows.
Chinese leaders agreed last week to raise the budget deficit to a record 4 per cent of gross domestic product next year, while maintaining an economic growth target of around 5 per cent, two people with knowledge of the matter told Reuters. REUTERS
