Dollar Firm as Powell Pushes Back on Aggressive Easing Bets, Reports Reuters

By Kevin Buckland

TOKYO (Reuters) – The U.S. dollar made gains against major currencies on Tuesday, following Federal Reserve Chair Jerome Powell’s remarks that tempered expectations for aggressive interest rate cuts.

The euro remained close to its one-week low from Monday, influenced by a drop in German inflation to its lowest level since early 2021, which fueled speculation about a potential rate cut this month.

Meanwhile, the yen stabilized near its average range against the dollar over the past month after experiencing volatility as markets assessed Japan’s new prime minister and his cabinet.

Australia’s dollar paused for breath after reaching its highest level since February last year, a rise attributed to stimulus measures in China’s economy, its largest trading partner.

In a speech delivered at a conference in Tennessee, Powell adopted a more hawkish stance, suggesting that the U.S. central bank would likely implement smaller, quarter-percentage-point rate cuts going forward. "This is not a committee that feels like it is in a hurry to cut rates quickly," he stated.

Traders continue to anticipate another rate cut at the upcoming policy meeting in November but have reduced expectations for a larger, 50 basis-point reduction to 35.4%, down from 53.3% a day prior.

The Fed initiated its easing cycle with a surprising half-point cut last month.

Powell’s remarks precede a busy week for U.S. economic data, including the Institute for Supply Management’s manufacturing index due later Tuesday, the non-manufacturing report on Thursday, and crucial jobs figures on Friday.

Ray Attrill, head of FX strategy at National Australia Bank, noted, "Powell indicated that the pace of rate cuts will depend on the data, leaving the possibility of further 50 basis-point moves in the future open." He added, "Friday’s payrolls data may prove decisive for the Fed’s decisions."

As of 0055 GMT, the dollar index increased by 0.07% to 100.85 after a 0.3% rise on Monday. It rose 0.23% to 143.95 yen, having fluctuated from a high of 146.495 yen on Friday to a low of 141.65 yen on Monday.

Shigeru Ishiba, who is expected to be confirmed as Japan’s new prime minister later Tuesday, is viewed as a monetary policy hawk despite recently moderating his rhetoric regarding the need for policy normalization. He won his party’s leadership vote on Friday in a closely contested race and is now working to unify the party ahead of a snap general election called for October 27.

The euro was flat at $1.1132 after dipping to $1.1113 in the previous session. Recent data revealed that German inflation slowed more than expected in September, marking its lowest rate since February 2021, with similar trends observed in Italy.

European Central Bank President Christine Lagarde indicated to parliament that "the latest developments strengthen our confidence that inflation will return to target in a timely manner," which will influence the policy decision on October 17.

The Australian dollar remained little changed at $0.6914 after rising to $0.69435 on Monday.

Over the weekend, China’s central bank instructed lenders to reduce mortgage rates by the end of October, while several major cities, including Guangzhou, Shanghai, and Shenzhen, eased home-buying restrictions significantly.

The yuan eased to 7.0116 per dollar in offshore trading on Tuesday, following a decline of approximately 0.36% overnight amid expectations of further monetary easing.

It’s worth noting that China will commence its Golden Week holiday on Tuesday, during which onshore financial markets will be closed.