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Dollar eases as traders bet Fed done with rate hikes

SINGAPORE : The dollar stayed on the back foot on Friday and was on course for a weekly decline against a basket of currencies as traders wagered that the U.S. Federal Reserve was most likely done with rate increases, lifting risk sentiment.

The dollar index, which measures the U.S. currency against six rivals, was at 106.22, not far from the one-week low of 105.80 it hit on Thursday. The index is on course to clock a 0.3 per cent drop for the week, just its third week of losses since July.

Markets are now pricing in a less than 20 per cent chance of a rate increase in December compared with 39 per cent a month earlier, CME FedWatch tool showed, in the wake of the U.S. central bank’s holding interest rates steady on Wednesday. The Fed, however, left the door open to a further increase in borrowing costs in a nod to the economy’s resilience.

Data on Thursday showed the number of Americans filing new claims for unemployment benefits increased moderately last week as the labour market continued to show few signs of a significant slowdown.

“The dataflow was supportive for the notion of a soft landing and the end of the U.S. hiking cycle being nearer,” said Tapas Strickland, head of market economics at NAB.

Investor focus will now be on October non-farm payrolls data later in the day, with consensus at 180,000 jobs, with a weaker result likely to put further pressure on the dollar.

Analysts said any pullback in the dollar will probably be temporary, pointing to the strength in U.S. economy compared with the rest of the world.

“Global economy is going to slow down while the U.S. economy seems to be more resilient … so Fed versus ECB, you might see more divergence and then the differential in real rates,” said Flavio Carpenzano, Investment Director for fixed income at Capital Group. “This is the reason why over the next few months, it’s difficult to see a big catalyst for the dollar to weaken.”

The European Central Bank last week snapped a streak of 10 straight rate increases, with the discussion shifting to how long the rates would stay high.

ECB board member Isabel Schnabel said on Thursday the central bank is on track to push inflation back down to 2 per cent by 2025 but the “last mile” of disinflation may be the toughest, so the bank cannot yet close the door on further rate rises.

The euro was down 0.03 per cent to $1.0617, having risen 0.49 per cent on Thursday. The single currency is set to clock a weekly gain of 0.5 per cent.

The Japanese yen was 150.41 per dollar, keeping traders nervy and looking for signs of intervention from Japanese authorities.

The yen has had a whirlwind week, touching a one-year low against the dollar and 15-year low against the euro on Tuesday after the Bank of Japan tweaked its yield curve control policy.

Kazuo Ueda, the central bank’s governor, will continue to dismantle its ultra-loose monetary policy and look to exit the decade-long accommodative regime next year, Reuters reported on Thursday.

Ueda’s intentions are based on interviews with six sources familiar with the BOJ’s thinking, including government officials with direct interaction with the bank.

Sterling was trading at $1.2189, down 0.10 per cent on the day, having risen 0.4 per cent, and was on course for a 0.5 per cent weekly gain. The Bank of England joined other major central banks in holding rates steady and stressed that it did not expect to start cutting them any time soon.

The Australian dollar eased 0.19 per cent to $0.642, while the New Zealand dollar fell 0.24 per cent to $0.588.

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