Dollar notches fresh highs as Fed cut bets recede

The dollar rose to an eight-week top against its major peers on Monday as traders clawed back bets for aggressive rate cuts by the Federal Reserve this year in view of a still-resilient US economy.

The yen as well as the Australian and New Zealand dollars, meanwhile, tumbled to two-month lows in early Asia trade, while the euro bottomed at a more than one-month trough of $1.07675. The single currency last bought $1.0782.

Sterling similarly edged 0.18 per cent lower to $1.2610, having earlier bottomed at $1.25985, its lowest since Jan. 17.

Against a basket of currencies, the dollar index peaked at 104.18, its highest since December. It was last steady at 104.02.

The Fed repricing has come on the back of Friday’s blockbuster US jobs report that far exceeded market expectations, reinforcing Chair Jerome Powell’s statement at the conclusion of the central bank’s policy meeting last week that a March rate cut was unlikely.

“A one-two punch from Jay Powell’s FOMC presser and a very strong nonfarm payrolls report have essentially closed the door on a March rate cut,” said Chris Weston, head of research at Pepperstone.

Traders are pricing in less than a 20 per cent chance that the Fed could begin easing rates in March, as compared to a nearly 50 per cent chance a week ago, according to the CME FedWatch tool. The odds for a cut in May have also lengthened.

In an interview with the CBS news show “60 Minutes” that aired Sunday night, Powell said the Fed can be “prudent” in deciding when to cut its benchmark interest rate, with a strong economy allowing central bankers time to build confidence inflation will continue to slow.

Fed funds futures now show roughly 120 basis points (bps) worth of easing priced in for the Fed this year, down from about 150 bps at the end of last year.

The Japanese yen was last marginally higher at 148.36 per dollar, having hit a trough of 148.82 earlier in the session.

The Aussie recouped early losses to last stand 0.05 per cent higher at $0.65145, after sinking as low as $0.64865 earlier in the day.

The kiwi was similarly 0.14 per cent higher at $0.60735, rebounding from its low of $0.6048.

“The dollar is likely to hold on to its recent gains,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

Treasury yields also jumped on expectations of higher-for-longer US rates, with the two-year yield , which typically reflects near-term interest rate expectations, last up nearly more than four bps at 4.4159 per cent.

The benchmark 10-year yield rose about three bps to 4.0656 per cent.

Elsewhere, China’s central bank continued to use the official guidance fix to keep its currency stable, after setting the midpoint rate for the yuan 1018 pips firmer than Reuters’ estimate, the biggest discrepancy since November 2023.

That supported the onshore yuan slightly, though it still struggled against a stronger greenback and bottomed at 7.1999 per dollar, matching the low on Jan. 17.

Its offshore counterpart fell to a more than two-week low of 7.2225 earlier in the session, and was last at 7.2121 per dollar.

The same day, the China Securities Regulatory Commission (CSRC) said it will closely monitor and take forceful measures to prevent risks from pledged shares as the stock market plunged to five-year lows.

“So far we’ve just seen speculation and some media reports talking about further support for the equity market or the property market. But we haven’t really seen a lot of details on those easing measures from the Chinese government,” said CBA’s Kong.

“So I think markets are still pretty doubtful about whether or not those reports will materialise.”