Dollar weakens as markets speculate Fed finished with rate hikes

On Wednesday, the dollar faltered across the board, having slumped overnight due to a surprisingly softer U.S. inflation reading. This prompted market speculation that the Federal Reserve has concluded its cycle of monetary tightening.

Simultaneously, the offshore Chinese yuan found support as domestic industrial output and retail sales growth exceeded expectations. Rob Carnell, Asia-Pacific Head of Research and Chief Economist at ING, characterized the data as “further evidence of very slow progress being made” in China’s economy. The offshore yuan briefly rose to a three-month high of $7.2385 against the dollar before retracing to $7.2477.

Despite positive economic indicators, concerns persisted in China’s property sector, with sales dropping at an accelerated pace in October, and real estate investment slumping, according to official data. Carnell expressed the view that these ongoing issues in the property sector might spill over into other parts of the Chinese economy, keeping overall performance moderately subdued.

The New Zealand dollar, often considered a proxy for China, reached a one-month high of $0.6029 against the dollar.

The broad sell-off in the dollar triggered a rally for other currencies, with the euro hovering just below a two-month high reached on Tuesday.

This currency market activity was set in motion by data revealing that U.S. consumer prices remained unchanged in October, causing market participants to nearly rule out the possibility of another rate hike at the Fed’s December monetary policy meeting. Bets on a rate cut in May next year increased to around 50%, as per the CME Group’s FedWatch Tool.

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Responding swiftly to the shift in market sentiment, traders pushed the dollar down 1.5% overnight against major currencies. Concurrently, U.S. Treasury yields, previously supporting the greenback, declined.

The dollar index, gauging the currency against a basket of peers, recently stood at 104.14, not far from Tuesday’s two-month low of 103.98.

As the dollar weakened, the euro stabilized around $1.08725 after reaching its highest level since August the previous day. The pound was at $1.2489, roughly matching September levels.

The yen, which had hit a one-year low of 151.92 on Monday, saw some relief as the dollar/yen inched up to 150.68. Data revealing Japan’s economic contraction in July-September complicated the central bank’s gradual exit from its ultra-easy monetary policy.

Despite this, Moh Siong Sim, currency strategist at the Bank of Singapore, anticipates softer U.S. yields and the potential for intervention by the Japanese government to limit further weakening of the yen. Combining these factors with a Federal Reserve likely to maintain a somewhat hawkish tone, Sim suggests that the dollar/yen is currently a “range-bound story.”