Dollar index set for first weekly fall this year
The U.S. dollar index was on track for its first weekly fall in 2024 on Friday as investors took a breather from buying the currency following an almost two-month rally built on expectations the Federal Reserve will begin cutting rates later than previously expected.
Investors have pushed back expectations for the first Fed rate cut to June, from May, and dramatically reduced how far they see the U.S. central bank cutting its benchmark rate. Fed officials have projected three 25 basis point cuts this year, while markets had priced for as many as seven.
"The dollar's rally this year has been predicated on the markets converging back to the Fed," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
Traders may also be pricing for the likelihood that economic data will begin to slow. "I think starting with the February jobs data, which is due March 8, we're going to begin seeing a series of weaker U.S. economic data," Chandler said.
Personal Consumption Expenditures (PCE) due next week may also provide clues for Fed policy.
The dollar index was little changed on Friday at 103.96. It has bounced from a five-month low of 100.61 on Dec. 28 and is holding below a three-month high of 104.97 reached on Feb. 14.
The greenback has bounced this year on enduring economic strength and as Fed officials caution against cutting rates too soon as they seek to bring inflation back closer to their 2% annual target.
Now, however, investors are waiting on further economic indicators for further clues on monetary policy.
"It's not the time yet to sell the dollar, but we think it will start to weaken in the second quarter, assuming that the Fed will cut in June and continue cutting rates once a quarter," said Athanasios Vamvakidis, global head of G10 forex strategy at BofA Global Research.
BofA expects the euro to strengthen to 1.15 versus the greenback by the end of the year.
"If the U.S. economy remains so strong, we have to change our view, as the Fed might not be able to cut in June or not even this year," he added.
Improved risk appetite that has seen stock markets set records in several countries this week may have also reduced demand for the U.S. currency, which is seen as a safe-haven.
The euro dipped 0.02% on the day at $1.0821 . It has dropped from $1.11395 on Dec. 28, but is up from $1.0695 on Feb. 14.
German business morale improved in February, a survey showed on Friday, though probably not enough to prevent Europe's biggest economy from slipping into another recession.
Yen worst performer
The yen is the worst-performing G10 currency this year, with the greenback gaining 6.6% against the Japanese currency. The dollar was steady against the yen at 150.50 on Friday.
The Japanese currency is headed for a fourth weekly drop as investors chased better yields just about everywhere else, wagering Japan's rates would stay near zero for some time.
With the Fed expected to hold rates higher for longer, investors are staying in carry trades in which they sell or borrow the yen and invest in higher yielding currencies.
"For the dollar/yen to weaken, we need the Fed to start cutting rates," said BofA's Vamvakidis.
In cryptocurrencies, bitcoin fell 1.14% to $51,050.