The U.S. dollar is witnessing the strongest week-long decline since the end of July, and this has created massive shocks in international currency markets as traders continue to drastically change their perceptions concerning Fed policies. In a remarkable turnaround, investors are now placing their bets on sharp monetary easing in the next month, and this has dramatically changed the face of international finance and trade relationships.
Fed rate cut expectations soar as data weakens
The dollar index, evaluating the greenback in relation to six foreign currencies, declined 0.61% this week—the largest this month since July 21st. Fed funds futures markets are now pricing in an 87% chance of the Fed easing rates by 25 bps at the December 9-10 FOMC Meeting, rising sharply from only 71% last week, using the FedWatch Tool provided by CME.
Labor market weaknesses have emerged as the leading driver for such expectations, as traders hold that conditions will compel the Fed despite the pressures on prices. The US Federal Government just released backlogged economic figures in light of their record 43-day government shutdown, and each of the releases indicated discouraging figures that are largely tilted towards further cuts in interest rates. Fed leaders are entering their period of blackout on Saturday, before the Fed Meeting in December.
Japanese yen strengthens on tightening speculation
Factors that contribute to the strength of the Japanese Yen include:
- Tokyo consumer prices increase 2.8% in November, outpacing forecasts
- Core inflation above the BOJ target of 2% on average
- Tight conditions in the labor market are contributing to wage pressures
- Government stimulus package of $117 billion in new spending
Bank of Japan Governor Kazuo Ueda’s speech on Monday will be closely watched for any indications regarding possible rate hikes, as traders are ardently awaiting whether it will be hinted at that the rate hike will be seen in December or later. Commenting on the situation, Capital Economics analysts wrote that given the current state of the labor markets and core inflation above 3%, it can be expected that the BOJ will restart its tightening cycle soon.
CME outage disrupts trading, but markets remain stable
In the derivatives segment, the problem of overnight cooling in the CyrusOne data facilities of CME Group led to the halt of trade in the popular currency platform and stock and commodity futures for more than 11 hours. Although the disruption in currency markets during US hours seemed unaffected, it took place at a time when trade volumes were low in the wake of the Thanksgiving holiday on Thursday. Most traders had made their month-end trades before the holiday, and this led to Range-bound trade action.
Sterling and the euro show mixed performance patterns
Sterling went unchanged at around $1.3237, yet it still had its strongest performance for about two months, gaining 1.09%, in response to the much-awaited budget statement made this week by British Finance Minister Rachel Reeves. It had a relief rally on Wednesday as much of the pessimistic news had already been factored in, in spite of announcements about expenditures that are expected to push the tax burden to a record level after WWII.
The euro went higher by 0.06% to 1.1602, though the Canadian dollar further appreciated as it was seen that the third-quarter growth in the Canadian economy had been much stronger than anticipated, and this had been fueled by the export of crude oil and government spending, causing the loonie to strengthen by 0.391.398 per dollar.
The hefty drop in the dollar index this week is only symptomatic of and marks the beginning of a change in the tides of expected monetary policies that are projected to significantly alter the currency landscape in the coming months. Thus, the coming period will be very important as central banks face the challenge of managing inflation and fostering growth in this ever-changing world.
