The U.S. dollar surged to its strongest level in nearly three months against nine major currencies on Monday, as traders significantly reduced their expectations for aggressive interest rate cuts by the Federal Reserve this year.
Fed funds futures now indicate around 115 basis points of easing for the Fed this year, down from about 150 basis points at the close of last year. A March cut is currently viewed as a 14.5 percent possibility, down sharply from 46.2 percent a week earlier, according to CME Group’s FedWatch Tool.
This shift in sentiment followed the release of new economic data, which bolstered confidence in the U.S. economy. According to the Institute for Supply Management (ISM), the U.S. services sector experienced growth in January, marked by an increase in new orders and a rebound in employment.
This positive momentum suggests that economic growth from the fourth quarter has carried over into the new year.
Market reevaluates rate cut forecasts
Previously, the ISM reported an increase in its non-manufacturing PMI from 50.5 to 53.4 in December. The number surpassed Reuters’ poll forecast of 52.0.
This reading, indicative of growth in the services industry driving over two-thirds of the economy, contributed to the market’s reassessment of rate cuts, the dollar’s strength and the potential upward trajectory of Treasury yields following Friday’s unexpectedly robust U.S. jobs report.
“The question is, who can keep up with the U.S. in terms of the rates adjustment?” Steven Englander, head of global G10 FX research and North America macro strategy at Standard Chartered Bank, said, as quoted by Reuters. “The market’s answer so far is not too many central banks and not too many of their currencies.”
Early on Monday, Treasury yields began to climb following Fed Chair Jerome Powell’s weekend statement suggesting that the U.S. central bank could delay rate cuts. Yields further increased following the release of the ISM survey results.
The dollar strengthened against all G10 currencies, which are among the most traded globally. The dollar index, monitoring the greenback against six major currencies, surged to 104.60, marking its highest level since November 14, to close at 104.40, up by 0.36 percent.
The two-year Treasury yield rose by 9.4 basis points to 4.4638 percent after a significant 18 bps jump on Friday. Meanwhile, the euro declined to its lowest level since November 14, reaching $1.0721 and ending at $1.0744, down by 0.43 percent.
Powell’s Fed outlook
During an interview on CBS News’ “60 Minutes” aired on Sunday but was conducted a day prior to Thursday’s jobs report, Powell asserted the Fed’s potential patience in deciding on benchmark interest rate cuts.
“The prudent approach is to allow time for data to confirm sustainable inflation movement towards two percent. We want to approach that question carefully,” Powell said.
“We’re focused on the real economy and doing the right thing for the economy and for the American people over the medium and long term. We have to balance the risk of moving too soon… or too late.”
In other news, Japan’s yen dropped to its lowest level since November 27, standing at 148.68 per dollar. Jane Foley, head of FX strategy at Rabobank, attributed this decline to the impact of a weakened eurozone economy on the euro. Data on Monday showed that German exports fell more than expected in December due to weak global demand.
“We have stagnation in Germany,” Foley said, as quoted by Reuters. “I think we’re going into a period when it’s going to be really hard for the euro to make significant gains.”
Sterling dipped 0.75 percent to $1.2537, its lowest since December 13, as the dollar strengthened. Despite revised data suggesting a lower-than-expected unemployment rate in Britain at year-end, the pound displayed minimal reaction. Bitcoin experienced a late trading decline of approximately 1.4 percent, reaching 42,355.70.