NEW YORK, Aug 19 (Reuters) – The dollar fell to a
seven-month low and the Japanese yen hit a more than one-week
high as traders awaited comments from Federal Reserve Chair
Jerome Powell this week likely to hint the U.S. central bank
will start cutting interest rates in September.
A key focus on Powell’s speech at Jackson Hole on Friday
will be whether he indicates that the Fed is likely to cut rates
by 25 or 50 basis points. Odds of a larger cut have declined
since data last week showed hotter-than-expected shelter
inflation for July and also a strong retail sales report for the
month.
Another main focal point will be whether Powell indicates
that rate cuts are likely at each meeting going forward. But
markets may be overestimate how far and fast the Fed is likely
to act.
“I think we’re still at the point of the justification to
cut in September,” said Eugene Epstein, head of structuring for
North America at Moneycorp in New Jersey.
“On a relative basis it would be kind of over the top to be
one of the last central banks to start their cutting cycle, but
then also to start cutting immediately and cut 50 basis points
and then cut every meeting after that.”
Traders are pricing in a 25% chance of a 50-basis-point cut,
down from 50% a week ago, with a 25-basis-point reduction having
odds of 75%, according to the CME Group’s FedWatch Tool. Around
210 basis points of rate reductions are expected by the end of
2025.
In early August traders aggressively priced for imminent
rate cuts after an unexpected increase in the unemployment rate
in July raised concerns about a possible recession.
A large unwind of popular dollar/yen carry trades, in which
traders borrowed the low interest rate yen and bought higher
yielding U.S. assets, also roiled the stock market and led to a
sharp repricing of rate expectations.
Now, “it seems like the market’s starting to correct itself
a little bit more in the right direction,” said Epstein.
Minneapolis Fed President Neel Kashkari said it was
appropriate to discuss potentially cutting U.S. interest rates
in September because of the rising possibility of a weakening
labor market, the Wall Street Journal reported on Monday.
San Francisco Federal Reserve Bank President Mary Daly said
it is time to consider adjusting borrowing costs from their
current range of 5.25% to 5.5%, speaking in an interview with
the Financial Times published on Sunday.
Federal Reserve Bank of Chicago President Austan Goolsbee
said on Sunday U.S. credit conditions are tight and getting
tighter, and that while there’s no certainty the Fed will cut
interest rates next month as is widely anticipated, not doing so
could hurt the job market.
Minutes from the Fed’s July meeting on Wednesday will also
be evaluated for any new clues on its expected rate trajectory.
The dollar index was last down 0.34% at 102.11 and
earlier reached 102.00, the lowest since Jan. 5. The euro
rose 0.19% to $1.1049 and got as high as $1.10545, its
strongest since Dec. 29.
The dollar weakened 0.75% to 146.48 Japanese yen
after earlier reaching 145.20, the lowest since Aug. 7.
The Japanese currency has gained on optimism that the
interest rate gap between the U.S. and Japan will continue to
shrink and due to a continued unwind of dollar/yen carry trades.
Bank of Japan Governor Kazuo Ueda is expected to discuss the
BOJ’s decision last month to raise interest rates when he
appears in parliament on Friday.
Japan’s consumer inflation rate likely picked up in July for
a third consecutive month, a Reuters poll of 18 economists
showed, keeping the central bank on course to consider another
rate hike after lifting short-term rates to 0.25% last month.
The Australian dollar rose on optimism that China will offer
new stimulus with shopping vouchers meant to help get growth
back towards this year’s target of roughly 5%.
The Aussie was last up 0.56% at $0.6703 and reached
$0.6708, the highest since July 19.
In cryptocurrencies, bitcoin fell 1.87% to $58,178.
(Reporting By Karen Brettell; additional reporting by Rae Wee
and Sruthi Shankar; editing by Mark Heinrich)
