The Impact Of Fed Data On Dollar

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The dollar rebounded on Friday after Federal Reserve Bank of New York President John Williams opposed market expectations of interest rate cuts. Despite the dollar index rising, it recorded its worst weekly performance since a month ago.

The dollar widely declined after updated interest rate projections from Federal Reserve officials on Wednesday indicated cuts of 75 basis points in 2024. Federal Reserve Chair Jerome Powell’s remarks at the end of the two-day Federal Reserve meeting were interpreted as adopting a more pessimistic tone, stating that the tightening of monetary policy might end. However, Williams, the president of the Federal Reserve Bank of New York, stated on Friday, “We’re not really talking about interest rate cuts at the moment.”

An expert noted that the Federal Reserve still heavily relies on data and doesn’t truly endorse market pricing to a large extent. Much of the dollar’s movement this week is attributed to rebalancing positions that were heavily tilted towards the dollar and focused on specific currency pairs, such as the Japanese yen. This is a story about excessive leverage and skewed positions in the market that need rebalancing more than any pessimistic interpretation of what Powell said earlier in the week.

On the other hand traders have strong expectations for interest rate cuts, with the first expected in March and cuts totaling 141 basis points by December.

The president of the Federal Reserve Bank of Atlanta, Raphael Bostic, stated on Friday that the Federal Reserve could start cutting interest rates “sometime in the third quarter” of 2024 if inflation decreases as anticipated. The president of the Federal Reserve Bank of Chicago, Charles Evans, also mentioned that the Federal Reserve may soon need to shift its focus to preventing rising unemployment rates by combating inflation.

Data on Friday showed that U.S. factory production increased in November, supported by a rebound in car production after the end of strikes. However, activity was weaker in other areas where manufacturing faces rising borrowing costs and declining demand for goods.

The dollar index is heading towards a weekly loss of 1.39%, marking its worst performance since November 19. The euro and the British pound received support on Thursday from the European Central Bank and the Bank of England, both opposing interest rate cuts. However, investors strongly bet on interest rate cuts from both central banks next year. The European Central Bank has more room than most banks to ease monetary policy due to the slowing growth in the eurozone and rapidly declining inflation. Nevertheless, ECB President Christine Lagarde’s opposition and her colleagues suggest speculation about the timing of the first easing, aiming to maintain currency strength to curb imported inflation.

The euro was also affected on Friday by news showing a surprising worsening of the decline in business activity in the eurozone in December. On another note, the Bank of Japan is the last major central bank to meet this month, and the question among traders and investors is whether it will signal its intention to abandon its policy of keeping interest rates at their lowest levels next week. The dollar rose in the latest trading by 0.24% to 142.15 yen, after falling to 140.95 on Thursday, its lowest level since July 31.

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