NEW YORK (Reuters) -The U.S. dollar touched a 10-week high on Monday in thin trading, extending its weeks-long bullish run sparked by data showing a modestly slowing economy that lined up with bets for moderate interest rate cuts by the Federal Reserve.
Volume was light with several markets, including Japan and Canada, closed on Monday. The U.S. bond market is shut for Indigenous Peoples’ Day.
The greenback rose against the Chinese yuan after China’s weekend stimulus announcements disappointed investors.
The dollar index, a gauge of the greenback’s value against six major currencies, rose to 103.36, the highest since Aug. 8. It was last up 0.2% at 103.23, while the euro dropped to a 10-week low below $1.09, and was last down 0.3% at $1.0902.
The European Central Bank is expected to lower rates this week, but the Fed remains the market’s focus. The U.S. rate futures market has priced in an 87% chance the Fed will ease by 25 bps at the November meeting, and a 13% chance it will pause and keep the fed funds rate at the target range between 4.75% and 5%, according to LSEG estimates.
The Fed slashed interest rates by an aggressive 50 basis points at its last policy meeting about four weeks ago.
For the rest of the year, the futures market expects about 45 bps in cuts and another 98.5 bps in rate reductions for 2025. That was way down from the roughly 200 bps in cuts that the market implied before the September Fed meeting and the blockbuster U.S. nonfarm payrolls report that reset easing expectations to a much shallower cycle than previously thought.
Expectations for smaller interest rate cuts have supported the dollar in the last few weeks, but that adjustment is likely on its last legs, analysts said.
“I suspect that it’s (rate adjustment) almost over and we’re back on the downtrend. But I do think there is still one more gasp,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
“We might trigger stops at $1.09 in the euro, or $1.30 in sterling. But I am looking ahead and the next U.S. jobs data is about 120,000. It’s going to be a weak number.”
Minneapolis Fed President Neel Kashkari on Monday reinforced the market’s thinking on the U.S. central bank’s easing policy.
“As of right now, it appears likely that further modest reductions in our policy rate will be appropriate in the coming quarters to achieve both sides of our mandate,” Kashkari said in a speech at a Central Bank of the Argentine Republic conference, referring to the Fed’s mission of keeping unemployment and inflation low.
ECB MEETING
In the euro zone, the euro fell for the 11th time in 12 sessions as investors moved to price in a 25 bp interest rate cut from the ECB with near-certainty at its Thursday meeting as data pointed to deteriorating euro zone activity.
Current indicators indicate continued weakness in the German economy in the past quarter, the economy ministry said in its monthly report on Monday.
Meanwhile, credit ratings agency Fitch revised France’s outlook to “negative” from “stable” on Friday, citing increases in fiscal policy and political risks.
The pound dipped 0.1% against the dollar to $1.3054.
Against the yen
Next on the market’s radar are U.S. retail sales and jobless claims data, and the ECB’s policy review, all due on Thursday.
In Asia, trading was dominated by Beijing’s fiscal stimulus briefing. China’s offshore yuan fell 0.3% against the dollar, and was last at 7.0906.
Without quantifying the proposed fiscal stimulus, Finance Minister Lan Fo’an told a press conference there will be more “counter-cyclical measures” this year.
“China’s weekend stimulus announcement proved underwhelming as policymakers demonstrated an increased commitment to supporting growth, but failed to deliver the hard numbers markets had been hoping for,” said Karl Schamotta, chief market strategist, at Corpay in Toronto.
The onshore yuan has fallen nearly 1% against the dollar since Sept. 24, when the People’s Bank of China kicked off China’s most aggressive stimulus measures since the pandemic.
In digital currencies, bitcoin rose to a two-week high and was last up 4.6% at $65,881. Ether surged 7% to $2,629 also touching a two-week peak earlier in the session.
