US Dollar rebounds as Fed's Williams talks down rate cuts

The US Dollar (USD) bounced on Friday after Federal Reserve Bank of New York President John Williams pushed back against the market’s rate cut expectations, though the index remained on track for its worst weekly performance in a month.

The dollar tumbled broadly after updated interest rate projections of Fed officials released on Wednesday showed an expectation for 75 basis points in cuts in 2024.

Fed Chairman Jerome Powell was also interpreted as striking a more dovish tone at the conclusion of the U.S. central bank’s two day meeting, when he said that the tightening of monetary policy is likely over, with a discussion of cuts coming “into view.”

But Williams said on Friday that “we aren’t really talking about rate cuts right now” at the Fed and it’s “premature” to speculate about them.

“It strikes some of the similar tones that we heard from Powell earlier this week but it kind of reinforces the fact that the Fed is still very much a data dependent bank and not really endorsing what the market’s pricing in to a degree,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.

Rai also noted that a large part of the move in the dollar this week has been due to rebalancing positions that were heavily tilted towards the greenback and focused in specific currency pairs, such as against the Japanese yen.

“This is a story about the inordinate amount of leverage and skewed positioning in the market that needed to be rebalanced more than any sort of dovish interpretation of what Powell said earlier this week,” he said.

Traders are pricing in aggressive expectations for rate cuts, with the first reduction seen likely in March and 145 basis points in cuts seen by December.

The dollar index was last up 0.39% on the day at 102.35. It fell to 101.76 on Thursday, the lowest since Aug. 10.

The euro fell 0.64% to $1.0920. It reached $1.1009 on Thursday, the highest since Nov. 29. Sterling dropped 0.42% to $1.2711, after reaching $1.2793 on Thursday, the highest since Aug. 22.

The euro and sterling were also supported by the European Central Bank (ECB) and Bank of England on Thursday pushing back against rate cuts.

Investors are nonetheless still betting heavily on rate cuts from both central banks next year.

The ECB has more scope than most to ease, according to Pepperstone strategist Chris Weston, given low euro zone growth and a rapid decline in inflation.

“However, the pushback from (ECB President) Lagarde and co suggests conjecture on the timing of initial easing – perhaps this is a function that it’s desirable to keep one’s currency strong to limit imported inflation.”

The euro was also dented by closely watched surveys on Friday showing that the downturn in euro zone business activity surprisingly deepened in December.

The Bank of Japan is the last of the major central banks to meet this month and the question among traders and investors is whether or not it will signal its intention to ditch its policy of keeping interest rates at rock bottom next week.

The dollar was last down 0.03% at 141.80 yen , after dropping to 140.95 on Thursday, the lowest since July 31.

Bitcoin fell 1.9% to $42,217.

Currency bid prices at 10:00AM (1500 GMT)