The U.S. dollar firmed against a basket of major currencies on Wednesday in Asian hours, holding near a one-month high touched in the previous session after hawkish comments from a Federal Reserve official tempered bets on an early rate cut.
As of writing, the dollar trades at 103.39 after hitting as high as 103.42 during the previous session, hovering near its strongest level since December 13. This figure marked its biggest one-day percentage gain since January 2. Adding to the dollar's rise, U.S. bond yields saw a jump following Monday's holiday. The 10-year yield climbed 11.9 basis points to reach 4.0695 percent.
The dollar added gains after Fed Governor Christopher Waller hinted that the U.S. may be nearing the Fed's inflation target of two percent but stressed the need for continued vigilance against price pressures. He urged against hastily cutting interest rates until lower inflation becomes firmly established. According to Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, Waller believed the rate cuts should be "methodical and careful."
Waller's dovish remarks dampened bets for an early rate cut. Market expectations for a March hike dropped to 62.2 percent from 76.9 percent the previous day, according to CME's FedWatch Tool.
While the shift aligns with a more measured policy view, analysts see further potential for scaled-back cuts. Tony Sycamore, market analyst at IG, noted that the market is "still anticipating 157 basis points of cuts in 2024" with potential "room for adjustments downwards."
Goldman Sachs maintained their forecast for three consecutive Fed cuts starting in March but also acknowledged Governor Waller's comments raised the possibility of a slightly delayed start or a slower pace with quarterly cuts.
Currencies slid against USD
Major currencies like the euro, pound and Australian dollar tumbled against the greenback on Tuesday, plunging below crucial technical points. They remained subdued on Wednesday.
The euro continued its slide on Wednesday, dropping 0.08 percent to hover near a one-month low of $1.0865. This comes after its steepest one-day percentage drop in two weeks on Tuesday, fueled by remarks from several European Central Bank (ECB) policymakers that kept investors guessing about the timing of future rate cuts.
According to an ECB survey on Tuesday, Eurozone consumers had dialed back their long-term inflation fears. A November survey showed their three-year outlook easing to 2.2 percent from 2.5 percent.
The British pound (GBP) declined by 0.19 percent to $1.2612 following a significant drop on Tuesday. The pound's potential for gains could be limited by weaker-than-expected wage growth and ongoing geopolitical tensions in the Middle East.
Both headline and bonus-adjusted earnings eased from October's pace, falling short of economists' predictions. The headline earnings slowed to 6.5 percent from 7.2 percent, worse than the 6.8 percent estimate. Meanwhile, the bonus-adjusted earnings dropped from 7.2 percent to 6.6 percent.
These softer data suggest that inflationary pressures in the U.K. might be cooling, potentially paving the way for the central bank to loosen monetary policy.
The yen remained on the back foot Wednesday, extending its slump for the third consecutive day. Hitting its weakest mark since December 6 against the dollar, the Japanese currency dipped to 147.44 per dollar during Asian trading hours.
A combination of recent events, including a major earthquake in central Japan, subdued inflation in Tokyo, and weaker-than-expected wage data could lead the Bank of Japan (BoJ) to hold off on its anticipated shift away from its ultra-loose monetary policy.
The New Zealand dollar initially defied the downward trend, briefly touching 0.6150 against the US dollar. However, it ultimately followed suit and dipped to 0.6126. Mixed economic data from China offered little support to the "China-proxy" Kiwi. Investor focus now shifts to U.S. retail sales data later in the day, which could provide further direction for the NZD/USD pair.