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US Dollar Declines as Federal Reserve Softens Tone and Data Points to Moderation

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The US dollar experienced a continued decline on Monday, marking its largest drop since July, after the Federal Reserve adopted a less hawkish stance and US data revealed signs of moderation. The dollar index fell by 0.2% to reach 104.85, its lowest level in six and a half weeks, after a 1.4% decrease last week. Meanwhile, the euro gained 0.2%, reaching a seven and a half week high of $1.0756. Last week, global stocks also enjoyed their strongest performance in a year as the belief that the Fed would halt its rate hikes gained traction.

The dollar’s decline can be attributed to various factors, including weaker US jobs data, softer manufacturing figures, and a decrease in longer-term Treasury yields. These developments have boosted sterling, the Australian dollar, and caused the yen to rebound from the weaker side of 150 per dollar. Tina Teng, a market analyst at CMC Markets in Auckland, stated, “We always say bad news is good news, so it’s good then there is expectation for the Fed and other central banks to end the rate hike cycle sooner.” Teng predicts that the dollar will continue to weaken throughout November.

Dane Cekov, a senior FX strategist at Nordea, described last week’s movements as an “overreaction,” suggesting that the jobs data was a “mixed bag.” While he anticipates that the dollar may remain somewhat weaker in the short-term, he believes that the euro-dollar rally will require additional support. JPMorgan analysts believe that a sustained selloff of the dollar would necessitate signs of improvement in the euro zone, China, and other regions, which they consider to be “still tenuous.” This sentiment is supported by recent manufacturing surveys from China and Europe’s GDP and inflation data.

The decline in Treasury yields last week, combined with Fed Chair Jerome Powell’s mention of “balanced” risks, contributed to further downward pressure on the dollar. Additionally, the US government reduced its refinancing estimate for this quarter and announced lower increases in long-term debt auctions than expected. Over the past two weeks, yields on 2-year notes have fallen by 25 basis points, while 10-year yields have remained close to a five-week low, standing at 4.5829%. The front end of the curve remains significantly inverted. Futures markets imply a 90% likelihood that the Fed has finished hiking rates and an 86% chance that the first policy easing will occur as soon as June.

The Japanese yen slipped by 0.1% to 149.47 per dollar. Nordea’s Cekov suggested that the yen would need to reach around 155 per dollar for Japanese authorities to consider intervention or to talk the currency up. Last week, the yen approached its lows from October 2018, which triggered multiple rounds of dollar-selling intervention by the Bank of Japan.

Meanwhile, sterling rose by 0.3% to $1.2414. The UK’s GDP data for the fourth quarter is set to be released this week. Despite rallying last week in a market that is heavily short the currency, the pound remains approximately 5.5% lower since its peak in July.

In the realm of cryptocurrencies, bitcoin remained steady at $34,974. The anticipated end of central bank policy tightening cycles has buoyed this risky asset. Additionally, the crypto industry has turned its attention to the potential introduction of new spot bitcoin exchange-traded funds (ETFs), which would expand market access to more investors. While no ETFs have been approved thus far, several firms have filed for such a product.

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

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