Dollar rebounds, Fed officials take center stage

By Karen Brettell

NEW YORK (Reuters) – The U.S. dollar edged higher against the euro on Monday, after earlier dipping to an almost 8-week low on growing expectations that the Federal Reserve is done hiking interest rates, with U.S. central bank officials in focus this week for further signals on rate policy.

Fed Chairman Jerome Powell is due to speak on Wednesday and Thursday, where the focal point will be on whether he maintains the more dovish tone he struck after the Fed’s two-day meeting last week.

Comments from other Fed officials will also be evaluated for signs on whether they expect further rate increases.

“Even though last week’s statement was unanimous, I do suspect that Powell’s view isn’t very widely shared, so I suspect we will start to see a divergence between the doves and the hawks on the FOMC,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto, referring to the Fed’s policy-setting Federal Open Market Committee.

Fed Gov. Lisa Cook said on Monday that she hopes the central bank’s current target interest rate is adequate to return inflation to the Fed’s 2% target.

Weaker than expected jobs growth in October released on Friday added to expectations of a slowing U.S. economy, which would support the Fed continuing to hold rates steady. The next major driver for markets will likely be next week’s consumer price inflation data for October.

“Next week’s CPI print is going to be the best adjudicator we have on whether or not the Fed needs to hike rates again,” said Rai.

“If we do get a weak print … then the focus shifts toward how much easing is being priced in for next year. If not, if we still do get a strong print, then we could see some dip buying in the dollar against several other currencies,” he added.

The dollar index was last up 0.13% on the day at 105.19 after earlier dropping to 104.84, the weakest since Sept. 20. The index fell 1.4% last week, its largest weekly decline since July.

The euro dipped 0.06% to $1.0723 after earlier rallying to $1.0756, the highest since Sept. 13.

Economic weakness in the euro zone relative to the U.S. may cap further gains in the single currency against the greenback.

“You could still see a somewhat weaker dollar in the short term, but if the (euro-dollar) rally continues, it needs to get some fuel from somewhere,” said Dane Cekov, senior FX strategist at Nordea.

A survey on Monday showed that the downturn in euro zone business activity accelerated last month as demand in the dominant services industry weakened further, suggesting there is a growing chance of a recession in the 20-country currency union.

The dollar rose 0.41% to 149.98 Japanese yen. Cekov said the yen likely needs to be around the 155 per dollar area for Japanese authorities to consider intervention or to talk the currency up.

The yen hit 151.74 per dollar last week, edging close to October 2022 lows that spurred several rounds of dollar-selling intervention by the Bank of Japan.

The Australian dollar fell 0.34% to $0.6491, after earlier reaching a three-month high of $.6523. The Reserve Bank of Australia is expected to raise its key policy rate by 25 basis points to 4.35% on Tuesday after keeping borrowing costs steady at its last four meetings.