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The U.S. Dollar Index (DXY) fell 0.50% last week and closed last week at $101.6 as investors continued to assess the potential scale of an expected interest rate cut from the Federal Reserve later this month after a mixed jobs report last week.
The U.S. dollar stayed resilient on Monday against its major rival currencies, as investors remained reluctant from taking large positions because markets are still divided on whether the Fed will lower rates by 25 or 50 basis points at the September meeting.
The August payrolls report released on Friday showed that the U.S. economy added fewer jobs than expected. The dollar held steady against the euro and sterling and gained ground on the yen and yuan, but pulled back versus the Aussie and Kiwi.
The overall bearish sentiment weighing down the greenback after the August unemployment data was sparked by the assumption that the Fed would have to cut bigger and quicker than the US data is suggesting.
The probability on Monday was 27% of a rate cut sized at 50 basis points in September, according to the CME FedWatch tool. It had jumped to ~50% on Friday after the mixed August payrolls report, from 40% on Thursday. Odds of a 25bp cut were at 73% on Monday.
Last week’s currency movements: (Sept 1 to Sept 6)
Euro (EUR:USD) +0.33%, The Gross Domestic Product in the Euro Area expanded 0.2% in the second quarter of 2024 over the previous quarter, Q2 GDP data showed. Employment also increased by 0.2% in June 2024.
Pound Sterling (GBP:USD) -0.01%, Sterling ended the week just about unchanged as investors wait for the release of UK labor market data on Tuesday.
Japanese Yen (USD:JPY) -2.55%.
Chinese Yuan (CNY:USD) -0.04%.
Swiss Franc (CHF:USD) +0.80%.
Australian Dollar (AUD:USD) -1.40%.
Canadian Dollar (CAD:USD) -0.58%.
BofA Global Research FX said in its weekly note that it remains bearish USD, counting on factors like slower US growth, risk sentiment on Fed rate cuts, as well as valuation and positioning.
“We would see chances for a 50bp cut in September increasing substantially, with the market possibly pricing 50bp also for November following a print below 100k. The USD could strengthen in risk-off initially, but this would be a rally to sell, in our view, as the Fed will come to the rescue,” BofA analysts wrote in the research note.
On the other hand, Goldman Sachs FX Trader research note suggested that dollar strength will not erode quickly or easily, especially if the Fed continues to move gradually as it currently looks set to do.
“…With rates currently in the driver’s seat for the Dollar, it can fall further if the Fed decides to speed up easing in response to softer data. But we continue to see limited room for sustained Dollar weakness without better return prospects abroad..,” GS analysts added in the note.
During the week, the ten-year yield (US10Y) fell by about 20 basis points to 3.71% and the 2-year yield (US2Y) fell 28 points lower to 3.65%.
Looking ahead to this week: Investors wait for key economic data scheduled to be released this week to get a better idea of the Fed’s plans for the economy. Investors will closely monitor this week’s pivotal events, such as US inflation data on Wednesday, the European Central Bank’s (ECB) monetary policy announcement on Thursday, and the July Consumer credit change.
Another interesting event to look out for investors would be the debate between former US President Donald Trump and Democratic candidate Kamala Harris on Wednesday as the US presidential election draws closer.
Dollar-Based ETFs: (UUP), (USDU), and (UDN).
