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Dollar falls on bets for dovish Fed
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Dollar falls on bets for dovish Fed
Aug 18, 2024 10:00 PM

SINGAPORE (Reuters) -The U.S. dollar declined broadly on Monday and slid against the yen in particular as investors bet on a dovish tone emerging in the Federal Reserve's July policy meeting minutes and Chair Jerome Powell's upcoming speech at Jackson Hole.

The minutes, due on Wednesday, and Powell's speech on Friday are likely to be the main drivers of currency movement for the week, which will also see inflation data from Canada and Japan alongside Purchasing Managers' Index readings across the U.S., euro zone and UK.

Against the yen, the greenback fell more than 0.8% to 146.37, retreating from a two-week high of 149.40 yen hit last week, though analysts said the sharp move lower was largely due to broad dollar weakness.

Bank of Japan (BOJ) Governor Kazuo Ueda is set to appear in parliament on Friday, where he is expected to discuss the central bank's decision last month to raise interest rates.

The BOJ's hawkish tilt last month contributed to the early August market turbulence in the wake of an epic unwinding of yen-funded carry trades, triggering a heavy selloff in risk assets and sending stock markets, including the Nikkei, crashing.

The volatility back then was compounded by a slew of softer-than-expected U.S. economic data - in particular, a weak jobs report for July, as investors feared the world's largest economy was headed for a recession and that the Fed was being slow in easing rates.

With those worries now moderating, the yen has since given up some of its strong gains, and Japanese investment data on Friday confirmed that investors were back to betting on the BOJ going slow on rate rises and on the yen staying cheap.

"The thing with carry trades is that it's impossible to tell with any confidence about the size of the trades," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

"We aren't so sure whether or not that unwind has more room to go or how much left of that unwinding (there is), but just based on the very sharp moves down in dollar/yen, I really doubt that pace will sustain going forward."

Elsewhere, the euro last bought $1.1039, edging towards an over seven-month high of $1.10475 hit last week. Sterling rose to a one-month high of $1.2960 earlier in the session and was last at $1.2957.

Against a basket of currencies, the dollar lost 0.24% to 102.21, not far from a seven-month low of 102.15.

Traders have fully priced in a 25-basis-point rate cut from the Fed in September, with a 24.5% chance of a 50 bp move. Futures point to over 90 bps worth of easing by year-end.

"Markets will be laser focused to what Powell has to say at the end of this week, and on that, I think it will be a great opportunity for Powell to either endorse or push back market pricing," said CBA's Kong.

"I think he'll at least greenlight a rate cut at the September meeting. If anything, I think he'll try to retain optionality because we do have some more data before the next meeting."

The New Zealand dollar gained 0.43% to $0.6078, while the Australian dollar struck a one-month top of $0.6694, as risk sentiment picked up on expectations for a dovish Fed outcome.

The Aussie was also helped in part by the paring of bets for imminent rate cuts Down Under, after Reserve Bank of Australia Governor Michele Bullock said on Friday it was premature to be thinking about rate cuts.

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