US Dollar Gains as Traders Scale Back Expectations for Larger Fed Rate Cut, According to Reuters

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The dollar made a comeback against the yen and other major currencies on Monday after experiencing losses the previous week. Investors appeared to be looking forward to crucial U.S. inflation data while also decreasing expectations for a significant interest rate cut by the Federal Reserve next week.

This marked the dollar’s first gain in five sessions against the Japanese currency and a second consecutive day of increases against the euro.

U.S. rate futures now fully anticipate a 25-basis-point rate cut at the Fed’s policy meeting on September 17-18, with about a 29% chance of a larger half-percentage-point cut, according to recent calculations. Just a few days earlier, the likelihood of the larger cut had surged to 50%.

For the upcoming year, traders predict approximately 113 basis points of easing, an increase from the previous estimate of around 100 basis points.

"I believe the Fed will implement a 25 basis point cut next week. There is potential for a larger rate cut of 50 basis points in November, depending on the forthcoming inflation data. However, the latest growth indicators suggest the economy is stabilizing, albeit at a slower pace," remarked Amo Sahota, executive director at Klarity FX in San Francisco.

"It would be excessive to claim the economy is collapsing or in a recession. Is the Fed lagging behind? Possibly, but they can catch up with a series of 25-basis-point moves. At some point, a 50-basis-point cut would enable the Fed to take the lead."

In afternoon trading, the dollar gained 0.4% to 142.84 yen, providing some relief after a challenging month. So far in September, the dollar has declined by 2.1%, with a 2.7% drop against the yen last week.

Against the euro, the dollar appreciated, causing the single European currency to dip 0.4% to $1.1041. This movement pushed a gauge of the dollar’s value against six major currencies up 0.4% to 101.56.

INFLATION DATA

Attention is now focused on the upcoming release of the U.S. consumer price index (CPI) report on Wednesday, even though the Fed has signaled a growing emphasis on employment rather than inflation. According to a Reuters poll, the headline CPI is expected to have risen by 0.2% month-over-month in August, unchanged from the previous month. However, year-on-year expectations forecast a 2.6% increase, down from 2.9% in July.

The U.S. jobs report for August, released on Friday, did not provide clarity on whether the Fed would opt for a standard 25-basis-point cut or a more significant 50-basis-point reduction next week.

Fed policymakers indicated they are prepared to initiate a series of rate cuts, noting a cooling labor market that could worsen without lowered borrowing costs.

Conversely, the European Central Bank is scheduled to meet on Thursday and is largely expected to reduce its main interest rate by 25 basis points to 3.50%, following a quarter-percentage-point cut that began its rate-cutting cycle in June.

Traders have predicted a 48% chance of a similar move occurring in December.

In other currency movements, the dollar increased by 0.6% against the Swiss franc, reaching 0.8482 francs, having hit an eight-month low against the franc on Friday.

The British pound fell to its lowest level in over two weeks at $1.3068, in anticipation of a wave of economic data this week that could influence expectations regarding the Bank of England’s policy decisions for the year. The pound was last seen down 0.4% at $1.3075.