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US Dollar Continues Decline as Federal Reserve Softens Rhetoric and Data Shows Moderation

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The US dollar continues to decline after experiencing its biggest drop since July last week. The Federal Reserve’s decision to adopt a less hawkish stance, along with signs of economic moderation in the US, have contributed to the dollar’s weakened position. The dollar index is currently hovering around a 6-1/2 week low of 104.84, having fallen approximately 1.4% last week. In contrast, the euro has gained 0.2% and reached a 7-1/2 week high of $1.0756. The anticipation that the Federal Reserve will cease raising interest rates has also led to a strong week for global stocks.

Weakness in US jobs data, softer manufacturing numbers, and a decline in longer-dated Treasury yields have all contributed to the weakened status of the dollar. As a result, the pound and the Australian dollar have seen significant rallies, while the yen has bounced back from its weaker position against the dollar. Tina Teng, a market analyst at CMC Markets in Auckland, explains that weak economic data is often perceived as good news because it increases the likelihood of central banks, including the Federal Reserve, ending the rate hike cycle sooner. Teng predicts that the dollar will continue to experience a downward trend throughout November.

Dane Cekov, senior FX strategist at Nordea, believes that last week’s movements in the market were an “over-reaction” and considers the US jobs data to be a “mixed bag.” While Cekov expects the dollar to remain weak in the short-term, he emphasizes that the rally between the euro and the dollar will require additional momentum. JPMorgan analysts argue that for a sustained dollar sell-off to occur, improvement in the euro zone, China, and other regions is necessary. However, they caution that such improvements are currently “still tenuous.” Recent growth and inflation data from the euro zone, as well as manufacturing surveys from China, reinforce this caution. A survey released on Monday suggests that business activity downturn in the euro zone has accelerated, further fueling concerns about a potential recession. Capital Economics Europe economist Adrian Prettejohn believes that the released data supports the forecast that euro-zone GDP will contract in the fourth quarter.

Futures markets indicate an 80% probability of the European Central Bank cutting rates by April and a 90% chance that the Federal Reserve has ceased hiking interest rates. Furthermore, there is an 86% chance that the Federal Reserve’s first policy easing will occur as early as June. Last week, Federal Reserve Chair Jerome Powell’s comments on balanced economic risks led to lower Treasury yields, which continued to decline following the release of softer US data. The US government has reduced its refinancing estimate for this quarter and announced lower increases in long-dated debt auctions than initially anticipated.

The Japanese yen has slipped 0.2% to 149.62.5 per dollar. Nordea’s Cekov believes that the yen would need to reach the 155 per dollar range for Japanese authorities to consider intervention or to openly discuss strengthening the currency. The yen reached 151.74 per dollar last week, approaching the October 2022 lows that prompted the Bank of Japan to conduct multiple rounds of dollar-selling intervention.

Sterling has risen by 0.4% to $1.2425. This week, the UK is set to release its GDP data for the third quarter. Despite the significant rally in the pound last week, it is still down by approximately 5.5% since its peak in July. In the cryptocurrency market, bitcoin is slowly increasing and is currently valued at $35,179. The anticipated end of central bank policy tightening cycles and the potential approval of new spot bitcoin exchange-traded funds have supported the recent rise in the value of bitcoin.

In conclusion, the US dollar has experienced a continued decline due to a shift in the Federal Reserve’s rhetoric and signs of moderation in the US economy. This decline has led to a stronger euro, significant rallies in the pound and the Australian dollar, and a rebound for the yen. While the dollar’s weakening trend is expected to continue throughout November, analysts caution that sustained dollar sell-off would require improvements in the euro zone, China, and other regions. The recent data from these regions indicates that such improvements are still uncertain. Additionally, the potential for central bank interventions and discussions surrounding currency strengthening exist for the yen. The UK’s GDP data for the third quarter is anticipated this week, and although the pound has experienced a significant rally, it remains lower in value compared to its peak in July. Bitcoin has also seen a recent rise in value due to expectations of the end of central bank tightening cycles and potential approval of new spot bitcoin exchange-traded funds.

More detail via Yahoo Sports here… ( Image via Yahoo Sports )

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