The US dollar gained ground on Thursday following a higher-than-anticipated inflation report, while the euro weakened slightly after the European Central Bank (ECB) implemented its fourth interest rate reduction of the year.
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November’s producer prices increased by 0.4% month-over-month, exceeding the 0.2% rise projected by economists polled by Reuters, according to a Labor Department report released on Thursday. This data reinforces expectations for a Federal Reserve rate cut next week, further influencing currency markets.
Dollar Index Climbs Amidst Global Rate Adjustments
The US dollar index, which tracks the currency’s performance against a basket of six major counterparts, rose 0.375% to 106.95. This follows a separate US inflation report on Wednesday that solidified expectations of a Federal Reserve rate cut in the upcoming week.
Current market pricing indicates a near-certain probability of a 25 basis point reduction at the Fed’s December 17-18 meeting, a significant increase from the approximately 78% chance predicted a week ago, as shown by the CME FedWatch tool.
Karl Schamotta, chief market strategist at Corpay, noted that although the Fed is expected to cut rates, recent actions by other central banks, including the Bank of Canada, Swiss National Bank, and the European Central Bank, maintain substantial interest rate differentials favoring the US dollar, thus bolstering its relative strength.
ECB Rate Cut Weakens Euro
The ECB announced a 25 basis point interest rate cut on Thursday, leaving the possibility of further easing open as inflation approaches its target and economic weakness persists. This decision contributed to the euro’s decline against the dollar, with the euro trading 0.2% lower at $1.0473.
Swiss Franc Rises Despite Rate Cut
The Swiss franc appreciated against the dollar despite the Swiss National Bank’s decision to implement a more aggressive 50 basis point interest rate cut, exceeding the 25 basis point reduction anticipated by most economists. The dollar strengthened against the franc, rising 0.78% to 0.89135.
Kirstine Kundby-Nielsen, FX research analyst at Danske Bank, acknowledged potential short-term headwinds for the Swiss franc following the rate cut. However, she maintains a broader outlook of euro-Swiss franc depreciation and franc strengthening over the next few months due to less optimistic economic prospects in the euro area.
Yen Stabilizes as BOJ Holds Steady
The dollar saw a slight increase against the yen, trading at 152.525, after reaching a two-week high of 152.845 the previous day. This followed a Reuters report indicating the Bank of Japan’s (BOJ) inclination to maintain steady interest rates, prioritizing further assessment of global risks and next year’s wage outlook.
Akira Moroga, chief market strategist at Aozora Bank, observed that while markets anticipate a potential rate hike in January, the shift in expectations has not significantly influenced investor behavior in the dollar-yen market.
Australian and Kiwi Dollars Weaken
The Australian dollar depreciated by 0.06% to $0.6365, moving further from its recent one-year low of $0.63370. This decline followed an unexpected drop in Australia’s unemployment rate to an eight-month low in November, leading to reduced market expectations for easing measures from the Reserve Bank of Australia in February.
The New Zealand dollar also weakened, falling 0.25% to $0.577 after reaching its lowest point since November 2022 at $0.57625 in the previous session.
China’s Economic Stimulus and the Yuan
The offshore yuan traded around 7.2772 per dollar. China announced plans on Thursday to expand its budget deficit, increase debt issuance, and implement looser monetary policies aimed at stabilizing economic growth.
In conclusion, the US dollar exhibited strength against several major currencies, influenced by robust inflation data and contrasting monetary policy decisions by central banks globally. Market participants will continue to monitor economic indicators and central bank actions for further direction in currency markets.
