The U.S. dollar maintained its position near a six-week high against major peers today, reflecting investor confidence in the Federal Reserve's cautious approach towards interest rate cuts amid a resilient U.S. economy.
The U.S. dollar index, tracking the currency against six counterparts, including the euro and pound, remained at 103.48. It had reached its highest level since December 13 at 103.82 in the previous session.
Support from the bond market is contributing to the dollar's resilience, with two-year yields increasing by 2.6 basis points and 30-year yields up by 5.1 basis points in a moderately bearish steepening. Additional pressure on yields could arise from the positive movement in oil prices on Tuesday, reaching $74.68 from a low of $73.41.
“Markets have been correcting from the narrative that rate cuts were incoming and incoming quickly, leading to dollar strength,” said James Kniveton, senior corporate FX dealer at Convera.
Meanwhile, the euro had already dropped 30 pips to 1.0850 on Tuesday before the release of January's consumer confidence data. It faced further declines following disappointing results from the report.
The shrinking trust consumers have in the economy raises doubts about how the eurozone will be affected by rising interest rates, but the savings from reduced energy costs remain advantageous.
The latest slide in EUR/USD has driven the pair to its lowest point since mid-December. GBP/USD, on the other hand, is underperforming but still has some distance before reaching its yearly lows.
The U.S. dollar's resurgence can be attributed in part to a shift in market expectations regarding the likelihood of a March interest rate cut. While it was initially considered a certainty at the beginning of the year, the probability has now fallen to 42 percent.
The U.S. economy will need to show signs of weakening inflation or employment before a rate cut is on the table. Upcoming economic releases including the U.S. services and manufacturing PMIs from S&P Global, as well as the Personal Consumption Expenditures (PCE) report, could provide further insight.
BOJ's monetary policy update
Another factor boosting the U.S. dollar this year has been its performance against the Japanese yen. The Bank of Japan (BOJ) held interest rates steady on Tuesday, as anticipated. However, BOJ governor Kazuo Ueda hinted at the possibility of an exit from negative rates.
The U.S. dollar to Japanese yen exchange rate experienced a brief dip due to Ueda's belief that monetary policy stimulus should still be implemented during hikes. This trend of volatility has been common in USD/JPY trading throughout the past year, with the pair up 800 pips since the beginning of 2023.
In addition to keeping rates steady, the central bank revised its inflation forecast for the upcoming fiscal year, lowering it to 2.4 percent from the previous 2.8 percent. Despite this adjustment, price gains are expected to continue surpassing the BOJ’s two percent target, a trend observed since April 2022.
While the BOJ maintained its policy guidance, there was a gradual increase in certainty regarding the achievement of its price target. This indication suggests a growing confidence in reaching the goal.
Economists widely believe that the BOJ will raise rates in the first part of this year, with scheduled meetings in March, April, June and July. The exact timing, however, remains uncertain.
Market reactions after the decision reflected investor difficulty in drawing fresh conclusions. The yen initially weakened against the dollar, but the currency reversed losses and strengthened later on.