Dollar pauses decline as traders await Fed signals

A downdraft in the dollar took a pause on Thursday as investors began hunkering down ahead of a slew of central bank meetings next week, where hawkish holds are expected on interest rates in Japan, the US and Europe.

The currency market is long the dollar on the assumption the AI boom keeps the US economy humming and that strong growth supports interest rates staying higher for longer.

Recent gains for sterling and currencies in Canada, Australia and New Zealand, all of which have lately touched their highest on the dollar in several weeks, suggest dollar bets have been pared a bit, though moves on Thursday were slight.

Sterling, which hit a one-month high of US$1.3409 earlier in the week, has been supported hotter-than-expected British inflation and held at US$1.33955.

The Australian dollar, which made a three-week top on Wednesday, is hanging on above 70 US cents at US$0.7025, while expectations for a rate hike next week in New Zealand hoisting the kiwi to a one-month high of US$0.5709.

Reserve Bank of Australia deputy governor Andrew Hauser said on Wednesday that the inflation outlook was looking “materially worse” in part due to high oil prices, pushing up market bets on whether the next hike in Australia comes as soon as next month.

The Bank of Canada is also expected to hike next week and the loonie was supported near a one-month top of C$1.4032 per dollar.

The euro and yen have settled into tight ranges, with the threat of intervention and prospect of rate hikes holding Japan’s currency around 158 to the dollar.

The euro has spent about a month on the slide, emerging as a favoured channel for putting a bet on a stronger dollar, as fiscal concerns in France and Europe’s energy fragility attract short sellers.

French 10-year yields hit their highest since 2022 on Wednesday as weekend unrest across France, fuelled in part by cuts to public services, has highlighted how politically difficult it will be to bring budget deficits under control.

But aside from a brief dip in the thin trade of Monday morning in Asia, the euro has kept fairly steady above US$1.12.

“The euro cannot sell off and it cannot rally,” said Spectra Markets’ president Brent Donnelly. “We are in a stalemate where the overhang of bad news just about perfectly offsets the market positioning.”

The European Central Bank is expected to hold its benchmark rate at 2.5% next week, though a hike is all but priced in before the year’s end. Markets have priced a hold in Tokyo, too, with the next hike – to 1.5% – expected early next year.

The Federal Reserve is seen on hold in October, with the Fed funds rate window at 3.75-4%, but hiking in December.

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