Dollar Drops Ahead Of FOMC

The U.S Dollar dropped against major currencies during the week ended December 5 amidst strong expectations of a Fed rate cut on December 10. The greenback’s slide was also attributed to traders assessing the likelihood of a dovish successor to Fed Chair Jerome Powell.

The greenback declined against the euro, the British pound, the Australian Dollar, the Japanese yen. the Swedish krona as well as the Canadian dollar but held firm against the Swiss franc. The Dollar Index which measures the Dollar’s strength against a basket of 6 currencies dropped close to half a percent during the past week.

Data released by the Institute for Supply Management on Monday showed U.S. Manufacturing PMI falling to 48.2 in November, compared to 48.7 in September and below forecasts of 48.6. The lowest reading in four months showed that the manufacturing sector contracted for the ninth consecutive month, boosting Fed rate cut expectations.

Data released by the Institute for Supply Management on Wednesday showed the U.S. Services PMI edging up to 52.6 in November from 52.4 in October versus forecasts of 52.1. The reading pointed to the strongest growth in the services sector in nine months.

Concerns about the job market further bolstered rate cut expectations. Wednesday’s ADP employment report showed private businesses in the U.S. cutting 32 thousand jobs in November, versus an upwardly revised gain of 47 thousand in October. The biggest decline in payrolls came when markets had anticipated the reading to show a rise of 10 thousand.

Data released on Thursday by the U.S. Department of Labor showed initial jobless claims declining to 191 thousand in the last week of November, which included the Thanksgiving holiday. Markets had expected a level of 220 thousand.

According to data released by the U.S. Bureau of Economic Analysis on Friday, the year-on-year PCE Price Index for September increased to 2.8 percent as expected. The core component thereof which was expected to remain steady at 2.9 percent, however, came in lower at 2.8
percent. The month-on-month PCE Price Index was steady at 0.3 percent, matching market expectations. The core component thereof also remained steady at 0.2 percent on expected lines. The Fed’s preferred inflation gauge though delayed revealed no spike in price pressures, renewing rate cut expectations.

Amidst the release of varied economic indicators, rate cut expectations remained strong, exerting pressure on the U.S. Dollar. From the level of 99.44 on November 28, the Dollar Index slipped 0.45 percent in a week’s time. The Index which had touched a weekly high of 99.57 on Tuesday dropped to the weekly low of 98.76 by Thursday. The Index however recovered and closed the week’s trading at 98.99.

Amidst the dollar’s weakness triggered by Fed rate cut hopes and an unexpected increase in inflation in the Euro Area, the EUR/USD pair rallied 0.41 percent during the week ended December 5. From the weekly low of 1.1589 touched on Monday, the pair climbed to a high of 1.1683 on Thursday. The pair eventually closed at 1.1643, versus 1.1596 a week earlier. Data released during the week revealed inflation unexpectedly rising as well as unemployment remaining steady.

The GBP/USD pair also increased during the week ended December 5 as the sterling maintained its post-budget bounce. The GBP/USD pair which had closed at 1.3238 on November 28 gained 0.70 percent during the week ended December 5 to close at 1.3331. The weekly trading range was wider, between a low of 1.3178 recorded on Tuesday and a high of 1.3386 recorded on Thursday.

The Australian Dollar jumped 1.37 percent against the U.S. Dollar during the past week amidst lingering concerns about stubborn inflation and a widely expected pause by the Reserve Bank of Australia at its meeting on December 9. Amidst the dollar’s weakness, the pair rose from the level of 0.6550 recorded on November 28 to close the week ended December 5 at 0.6640. During the week, the pair oscillated between a low of 0.6532 recorded on Monday and the high of 0.6650 recorded on Friday.

The U.S. Dollar declined against the Japanese Yen also during the week ended December 5 dictated by the widening monetary policy divergence between the two economies. The USD/JPY pair closed the week at 155.35 versus 156.18 a week earlier, registering a loss of 0.53 percent. The pair ranged between the high of 156.27 recorded on Monday and the low of 154.33 recorded on Friday.

Rate cut expectations from the Fed which stood at 86.2 percent on Friday have firmed up to 87.4 percent at the onset of the new week. The 6-currency Dollar Index is currently at 98.95 versus Friday’s close of 98.99.

Amidst anxiety ahead of the FOMC, currency markets are in a state of abundant caution. The EUR/USD pair is currently at 1.1653 versus 1.1643 on Friday. The GBP/USD pair has edged up to 1.3338 from 1.3331 on Friday. Amidst caution ahead of the rate decision by the Reserve Bank of Australia, the AUD/USD pair is at 0.6641 versus 0.6640 at close on Friday. The USD/JPY pair has rallied to 155.42 from the level of 155.35 recorded at the end of the previous week.

Forex News