Fed Rate-Cut Pushback Puts Dollar on Track for a Quarterly Gain
(Bloomberg) — The US dollar is poised to close out the first quarter on a strong note as Federal Reserve officials push back against the latest bout of rate-cut wagers.
Hawkish remarks from Fed Governor Christopher Waller added to speculation the central bank is in no hurry to loosen policy and will lag others in pivoting to rate cuts. That drove traders to pare bets that the Fed will start easing in June and helped drive the euro below 1.08 per dollar for the first time in a month.
The has gained 2.6% against major peers in the past three months, the strongest appreciation since the third quarter of last year. The Fed’s preferred inflation metric is due Friday, along with a speech by Jerome Powell, which could push up the currency more if the two support speculation that the central bank is in no rush to change course.
“The market could react in quite an asymmetric fashion to tomorrow’s PCE release, with an above-consensus print prompting quite a sharp repricing,” Rabobank strategists including Richard McGuire wrote in a note to clients, referring to the core personal consumption expenditures price index, which strips out volatile food and energy components.
On Thursday, a Bloomberg gauge of the dollar posted a slight gain amid choppy, month-end trading after a release of revised, US gross domestic product data showed the economy grew at a 3.4% annualized pace in the fourth quarter, above a 3.2% estimate.
Treasuries held losses after the GDP release, with the yield on two-year Treasury notes up around three basis points to 4.6%. The cash Treasury market is set for an early close Thursday and a full close Friday for the Good Friday holiday.
Read more: Dollar Rally Is on Borrowed Time as US Disinflation Lags World
The prospect of later rate cuts by the Fed is burnishing the comparative appeal of the US currency. Last week, the Swiss National Bank became the first developed-market central bank to reduce rates, while policy hawks at the Bank of England softened their stance.
Europe’s “significantly weaker cyclicals” mean the European Central Bank will need to “dramatically outpace the Fed in terms of easing this year,” Simon Harvey, head of FX analysis at Monex Europe wrote in a note.
In Japan, meanwhile, the central bank’s first rate hike since 2007 has failed to change the yen’s weakening trajectory against the dollar.
The prospect for a stronger dollar could push the euro toward 1.07 in the coming days, according to Harvey.
Futures traders are now pricing in a roughly 60% possibility that the Fed will start cutting rates in June, down from nearly 80% a week ago. According to the Rabobank strategists, traders could give up on a June hike altogether.
–With assistance from Carter Johnson.
(Updates to reflect GDP release, market levels)
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