The US dollar retreated from its two-month highs reached overnight against major currencies, as signs of labor market weakness fueled expectations for faster rate cuts from the Federal Reserve.
Nevertheless, the dollar remained poised for its second consecutive weekly gain on Friday, following surprisingly strong payroll data last week. This led traders to dismiss the likelihood of a half-point rate cut at the Fed’s next policy meeting.
Thursday’s rise in initial jobless claims complicated market sentiment, especially when combined with the same day’s increase in the Consumer Price Index (CPI), which highlighted the potential need for continued tight monetary policy to tame inflation.
According to the CME Group’s FedWatch Tool, the odds of a quarter-point rate cut at the Fed’s November 7 meeting increased to 83.3% from 80.3% the previous day. A week earlier, there had been a 32.1% chance of a half-point cut and a 67.9% probability of a quarter-point reduction.
The yield on the two-year US Treasury note, often influenced by interest rate expectations, declined on Friday and stood at 3.9531% in early trading, contributing to downward pressure on the dollar.
The dollar index, which tracks the greenback’s performance against six major peers, was steady at 102.84 as of 0111 GMT, but slipped 0.3% from Thursday’s high of 103.17, its strongest level since August 15. Despite the decline, the index was on track for a 0.39% weekly gain, building on the prior week’s 2.06% jump.
While the Fed has shifted its focus more toward full employment over price stability, investors were closely watching the CPI report for signs that inflation is under control.
“The result led to some volatility in global markets, but overall, yields haven’t changed much,” said Tapas Strickland, head of market economics at National Australia Bank. “The CPI outcome doesn’t significantly alter the moderating inflation narrative and should keep the Fed on course to return policy to a more neutral stance, whatever that may be.”
Fed officials’ remarks on Thursday revealed differing opinions. Chicago Fed President Austan Goolsbee indicated that most policymakers expect rates to “gradually fall a fair amount to levels well below where they are today.” In contrast, Atlanta Fed President Raphael Bostic said he is “open” to skipping a rate cut in November.
The dollar edged up 0.06% to 148.68 yen, approaching Thursday’s high of 149.58 yen, a level not seen since August 2.
The euro held steady at $1.093650 after bouncing back from a two-month low of $1.090025.
The Australian dollar also remained firm at $0.67395, recovering from its Thursday low of $0.6702, its weakest since September 16.
Australia’s currency has been impacted by fluctuating stimulus expectations from its largest trading partner, China. The Chinese finance ministry is set to hold a press conference on fiscal policy on Saturday.
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