Euro, yen climb as dollar rally pauses

The euro and Japanese yen rose on Thursday as the US Dollar (USD) stalled after rallying to a nearly three-month high, but the greenback moved off earlier lows as data supported views for slower rate cuts by the Federal Reserve.

Weekly initial jobless claims fell to 227,000, below the 242,000 estimate of economists polled by Reuters, while continuing claims rose to a three-year high. The Fed is likely to discount the climb this month due to distortions from Hurricane Helene.

A separate report from S&P Global said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, rose to 54.3 this month from a final reading of 54.0 in September. A reading above 50 signals expansion.

The greenback has climbed in 16 of the past 18 sessions, on pace for its fourth straight week of gains, as a run of positive economic data has quieted expectations about the size and speed of the Fed’s rate cuts, which has also lifted U.S. Treasury yields.

“We’re looking at some profit-taking here,” said Joseph Trevisani, senior analyst at FXStreet in New York.

“But underneath that, of course, has been the shift in rates and the shift in perception about what the Fed is going to do. And that hasn’t changed so for the moment, we’re kind of holding.”

The dollar index , which measures the greenback against a basket of currencies, fell 0.22% to 104.21, with the euro up 0.17% at $1.0799 after hitting a nearly four-month low of $1.076 on Wednesday.

A survey showed euro zone business activity stalled again last month, but the contraction in Germany, Europe’s largest economy, was less steep than the previous month.
Recent comments from Fed officials have indicated the central bank will take a gradual approach to cutting rates.

Markets are pricing in a 96.5% chance for a cut of 25 basis points at the Fed’s November meeting, with a 3.5% chance of the U.S. central bank holding rates steady, according to CME’s FedWatch Tool. The market was completely pricing in a cut of at least 25 bps a month ago, with a 58.2% chance of a 50 bps cut.

In contrast, expectations for faster and potentially bigger rate cuts from the European Central Bank (ECB) have increased to weigh on the euro, after a host of policymakers warned about the risk of undershooting the central bank’s 2% inflation target.

ECB policymaker Robert Holzmann said the central bank could cut rates by 25 basis points at its December meeting if circumstances including inflation allow it. Latvian central bank Governor Martins Kazaks said inflation could fall quicker than expected but the ECB should stick to its practice of cutting rates step by step given the exceptional uncertainty.

The dollar has also benefited from a rise in market expectations for a victory next month by Republican candidate and former U.S. President Donald Trump, which would likely bring about inflationary policies such as tariffs.

Sterling strengthened 0.29% to $1.2958. British finance minister Rachel Reeves said she would change the measure of public debt that the government targets in next week’s budget to allow more borrowing for investment.

Against the Japanese yen , the dollar weakened 0.58% to 151.86. Japanese Finance Minister Katsunobu Kato issued a warning against currency speculation on Wednesday, expressing concern over “one-sided, rapid” moves in the currency market that have been driving down the yen’s value.

Japan’s coalition government under new Prime Minister Shigeru Ishiba is at risk of losing its majority in parliament in Sunday’s election, recent polls show, and any rise in political uncertainty would further complicate the Bank of Japan’s plans for monetary policy normalisation.

BOJ Governor Kazuo Ueda said overnight it was “still taking time” to sustainably achieve the central bank’s 2% inflation target, and signalled that rate hikes would be done “cautiously and gradually”. But he also warned of the cost of moving too slowly, which could encourage speculators to push the yen lower.

In the upcoming election, polls show Prime Minister Shigeru Ishiba’s Liberal Democratic Party may struggle to retain its parliamentary majority which could complicate monetary policy plans by the BOJ.