Dollar weaker on renewed Fed rate cut hopes

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The dollar index was lower on Monday for a fourth straight session as a softer-than-expected US jobs report last week supported recent comments from Federal Reserve Chair Jerome Powell, but the greenback strengthened against the yen after last week’s suspected interventions.

The dollar index, which measures the greenback against a basket of major currencies, was on track for its longest streak of declines since early March.

Friday’s US payrolls report showed the smallest jobs gain since October, easing concerns the Fed would have to keep rates higher for longer.

The data helped affirm comments from Powell after the Fed’s policy statement on Wednesday that rate increases remained unlikely.

The economic calendar is light this week, highlighted by the consumer sentiment reading from the University of Michigan on Friday, while a host of Fed officials are due to speak, including Richmond Fed President Thomas Barkin and New York President John Williams on Monday.

“It will (stay weaker) as long as the data stays conducive to that and as long as those Fed speakers don’t rebut Jay Powell, but I have a feeling that some of them will,” said Thierry Wizman, global FX and rates strategist at Macquarie in New York.

“The labour market is evidently more loose now than it was a year ago, but at the same time, these guys who are more hawkish could easily build arguments to make a case for higher for longer.”

The dollar index fell 0.23% at 104.93, with the euro up 0.23% at $1.0783.

The yen was weaker against the greenback after last week notching its strongest weekly gain since early December 2022 following two rounds of suspected intervention from the Bank of Japan to pull the currency away from a 34-year low of 160.245 per dollar.

It gained 3.5% in the week.

On Monday, the yen weakened 0.44% against the greenback to 153.68 per dollar.

Japanese and British markets were both closed for a holiday on Monday, but with Japanese authorities choosing last week’s quiet periods to intervene in the currency market, traders remained on guard to the possibility of another.

Traders estimate the Bank of Japan (BOJ) spent nearly $59billion defending the currency last week, but likely only bought some time, analysts say, as the market still views the currency as a sell.

Still, “it’s pretty treacherous right now to be going long dollar yen,” said Wizman. “It’s not because FX intervention per se is effective, it’s just that if the BOJ thinks that US yields have peaked, not saying they have, but if they think that US yields have peaked, they’re going to be encouraged to try to intervene again.”

While Japan clearly has capacity to intervene more, the broader macro environment remains quite negative for the yen, according to Goldman Sachs strategists, noting intervention “success” can go only so far.

Barclays analysts said the interventions will do “little more than delay the eventual” move higher in the dollar, rather than stem it.

The yen has been under pressure as US interest rates have risen while Japan’s have remained near zero, pushing cash out of currency and into higher-yielding assets.

The latest weekly report from US regulators showed that non-commercial traders, a category that includes speculative trades and hedge funds, reduced their yen short positions to 168,388 futures contracts in the week ended April30, still close to their largest bearish positions since 2007.

Markets are now pricing in nearly 50 basis points of cuts from the Fed this year, according to CME’s Fed Watch Tool, pricing in a 66.6% chance of a rate cut of at least 25 basis points in September.

Sterling strengthened 0.29% at $1.2581 ahead of a Bank of England policy announcement on Thursday, where interest rates are expected to be held at 5.25%.