Dollar stays weak as Fed rate cut bets increase

The US dollar tumbled across the board on Friday and extended losses against some of its major peers on Monday after the US employment report revealed that the world’s largest economy saw its fewest job gains in six months in April, while annual wage growth fell below 4.0% for the first time in three years.

Signs that the labor market is cooling faster than expected allowed investors to add to their rate-cut bets, especially after Fed Chair Powell suggested last week that the Committee is still leaning towards cutting interest rates. According to Fed funds futures, there is a nearly 85% chance for a quarter-point cut to be delivered in September, while the total number of basis points worth of reductions expected by the end of the year has risen to 45.

What may have also encouraged market participants to increase their cut bets were remarks by Fed officials John Williams and Thomas Barking, who corroborated Powell’s view that rate hikes are unlikely and that eventually they will lower interest rates.

With that in mind, and in the absence of major US data, attention today is likely to fall on a speech by Minneapolis Fed President Neel Kashkari. Kashkari is an outspoken hawk and thus, traders may be eager to find out whether he agrees with his colleagues. If he shares the view that the next move in interest rates is most likely to be down, the dollar could suffer some more losses as investors lower their implied rate path a bit more.

The yen entered this week on the back foot after ending its strongest week since early December 2022 due to two episodes of suspected intervention by Japanese authorities.

Although the Japanese currency gained as much as 5.25% since the first intervention round that was triggered after dollar/yen poked its nose above 160, this week’s slide corroborates the view that intervention on its own may not be enough to reverse the tide.

Yes, the chances for another strike by Japanese authorities remain elevated but for a yen recovery to be sustained, the BoJ may need to change the tone of its language as well. At its latest meeting, the Bank refrained from providing clear signals on whether another hike may be warranted soon, disappointing those expecting a summer move.

The aussie was the currency that took the most advantage of the dollar’s slide since Friday, but it gave back a decent portion of those gains today after the RBA reiterated that the path of interest rates remains uncertain and that the Board is “not ruling anything in or out.”

With Australian inflation proving stickier than expected and the labor market remaining strong, investors may have been anticipating a hawkish shift by the RBA and thus, maintaining a neutral stance was seen as a disappointment.

Wall Street cheered the prospect of more rate cuts by the Fed, with all three of its major indices closing in the green on Monday. Both the S&P 500 and the Nasdaq gained more than 1%, with their technical pictures suggesting that the latest corrections are over and that the prevailing uptrends have been resumed.

The prospect of more basis points worth of Fed rate cuts by the end of the year may not be the sole driver though. A better-than-expected earnings season, with tech giants like Alphabet and Microsoft reporting that their growth continues to be driven by artificial intelligence (AI) investments, has also encouraged investors to add to their risk exposure.