Dollar steadies as economic data muddies Fed expectations By Reuters

By Amanda Cooper

LONDON (Reuters) -The dollar held its ground on Thursday after a volatile two days that saw sharp declines followed by a rebound as traders took incoming economic data as signalling the Federal Reserve will wait longer before cutting interest rates.

The – which tracks the U.S. currency against six other units – was steady at 104.33. It gained 0.31% on Wednesday, following a 1.51% plunge the previous day – its largest drop for a single trading day in a year.

The euro was up around 0.1% at $1.0857, as was the yen at 151.16. Against sterling the dollar was flat at $1.24085.

The dollar drew support from better-than-expected retail sales numbers combined with more signs of cooling inflation, feeding into the narrative for an economic ‘soft landing’, which would allow the Fed more time before cutting rates.

“We’re seeing the dollar trading weaker versus other currencies today, off the back of those retail sales that are putting a dampener on those hopes that, potentially, we could see a rate cut sooner rather than later,” Hargreaves Landsdown strategist Susannah Steeter said.

“Session by session, sentiment is really fluctuating on this. The Fed has said it’s driven by the data so that is what is driving the market specifically.”

The timing of the first cut has come forward this week, but the amount by which the Fed might lower rates has changed following Wednesday’s stronger consumer spending numbers.

Traders remain certain that rates will not go higher, but have trimmed the odds for a first reduction by March to less than 1-in-4 from better than 1-in-3 a day earlier, according to the CME Group’s (NASDAQ:) FedWatch Tool.

Based on the rate implied by futures markets, they are pricing for around 70 basis points’ worth of cuts over 2024, compared with expectations for 80 bps of easing a week ago.

“While inflation is falling, the economy remains robust, which might even allow the Fed to increase rates if they chose,” said James Kniveton, senior corporate FX dealer at Convera, while noting there doesn’t seem to be appetite for a hike among Fed officials currently.

Deutsche Bank strategist Jim Reid on Thursday cited research from his bank’s economists that showed in the last two years, this is the seventh occasion on which markets have priced in a swift shift by the Fed to rate cuts. On the previous six, those expectations entirely unwound.

“At some point there will be a dovish pivot, and this could be closer than the others to it, but be wary that we’ve now been to this well seven times in two years,” Reid said.

Elsewhere, the eased 0.1% to $0.6502, while the New Zealand dollar fell 0.3% to $0.605.

The Australian currency failed to draw support from a strong rebound in employment, as traders keyed on the fact that gains were mostly in part-time labour, while the jobless rate actually ticked higher.