US dollar hits nine-week high; euro down

The US Dollar (USD) hit a nine-week high on Monday in thin trading, continuing its bullish trend in the last few weeks, triggered by economic data that, while trending lower, remained stable overall.

This suggested that the Federal Reserve, which launched its monetary easing cycle nearly four weeks ago, will implement moderate interest rate cuts going forward after an aggressive 50 basis-point reduction at its last policy meeting.

The dollar index, a gauge of the greenback’s value against six major currencies, rose to 103.26 , the highest since mid-August. It was last up 0.1% at 103.18, with gains made at the expense of the euro, which fell 0.2% to $1.0913 , ahead of an expected interest rate cut this week from the European Central Bank.
Separately, the dollar rose against the Chinese yuan after investors found China’s weekend stimulus announcements disappointing.

But currency market participants’ focus remained on Fed rate expectations. The U.S. rate futures market has priced in an 87% chance the Fed will ease by 25 bps at the November meeting, and a 13% chance it will pause and keep the fed funds rate at the target range between 4.75% and 5%, according to LSEG estimates.

For the remainder of the year, the futures market expects about 45 bps in cuts and another 98.5 bps in rate reductions for 2025. That was way down from the roughly 200 bps in cuts that market implied before the September Fed meeting and the blockbuster U.S. nonfarm payrolls report that reset easing expectations to a much shallower cycle than previously thought.

Smaller interest rate cut expectations have supported the dollar in the last few weeks, but that adjustment is likely on its last legs, analysts said.

“The real questions for people right now are: Is the interest rate adjustment since the jobs data over? Where are we relative to that? I suspect that it’s almost over and we’re back on the downtrend” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

“But I do think there is still one more gasp: We might trigger stops at $1.09 in the euro, or $1.30 in sterling. But I am looking ahead and the next U.S. jobs data is about 120,000. It’s going to be a weak number,” he added.

Minneapolis Fed President Neel Kashkari on Monday reinforced the market’s thinking on the U.S. central bank’s easing policy.

“As of right now, it appears likely that further modest reductions in our policy rate will be appropriate in the coming quarters to achieve both sides of our mandate,” Kashkari said in a speech delivered before a conference held by the Central Bank of the Argentine Republic, referring to the Fed’s mission of keeping unemployment and inflation low.

ECB MEETING

In the euro zone, the euro fell for the 11th time in 12 sessions as investors moved to price in a 25 bp interest rate cut from the ECB with near-certainty at its Thursday meeting as data pointed to deteriorating euro zone activity.

Current indicators indicate continued weakness in the German economy in the past quarter, the economy ministry said in its monthly report on Monday.

Meanwhile, credit ratings agency Fitch revised France’s outlook to “negative” from “stable” on Friday, citing increases in fiscal policy and political risks.

The pound dipped 0.2% against the dollar to $1.3047 .

Against the yen , the dollar climbed to its highest since early August to 149.96 yen in thin trading, as Japanese markets were shut for a bank holiday.

U.S. Treasuries were also unlikely to provide much of a lead since bond markets were closed for Columbus Day.

Traders next have on their radar Thursday’s retail sales and jobless claims data in the U.S., in addition to the ECB’s policy review.

Trading in Asia, meanwhile, was dominated by Beijing’s fiscal stimulus briefing. China’s offshore yuan fell 0.3% against the dollar, and was last at 7.0906.

Without providing details on the size of the fiscal stimulus being prepared, Finance Minister Lan Foan told a press conference there will be more “counter-cyclical measures” this year.

The onshore yuan has fallen nearly 1% against the dollar since Sept. 24, when the People’s Bank of China kicked off China’s most aggressive stimulus measures since the pandemic.
In digital currencies, bitcoin rose to a two-week high of $66,263, and was last up 4.6% at $65,908. Ether surged 6.6% to $2,620 also touching a two-week peak earlier in the session.