The US Dollar (USD) experienced a decline from its 12-week peak on Monday as Federal Reserve Chair Jerome Powell hinted at the possibility of further rate hikes. Meanwhile, the euro, which is sensitive to developments in China, saw a slight increase after Beijing reduced its stamp duty on stock trading.
The dollar index, which measures the value of the US currency against six major peers, dropped by 0.06% to 104.11. Despite this decline, the index is up by over 2% in August, putting an end to its two-month losing streak.
During his speech at the annual Jackson Hole Economic Policy Symposium, Powell reassured markets that the Fed would proceed with caution in its upcoming meetings. He acknowledged progress in easing price pressures, as well as the risks posed by the unexpectedly strong US economy.
According to the CME FedWatch tool, there is an 80% chance that the Fed will maintain the current interest rate next month. However, the probability of a 25 basis point hike in November has increased to 51% compared to 33% a week earlier.
“It is unlikely that we will see a hike from the Fed in September,” said Chris Weston, head of research at Pepperstone. “But November is shaping up to be an eventful month, with potential interest rate expectation fluctuations based on data points.”
Weston added, “While many G10 central banks are already pausing their rate hikes, the possibility of the Fed taking action in November is providing support for the dollar.”
Strong US economic data releases have alleviated concerns of a recession. However, with inflation still above the Fed’s target, some investors worry that the central bank will maintain high interest rates for an extended period.
Given the Federal Reserve’s emphasis on upcoming US economic data, investors will closely monitor reports on payrolls, core inflation, and consumer spending throughout the week.
Euro’s Summer Performance
On the other hand, the euro, which has experienced a decline of 1.7% thus far in August, rose by 0.14% to $1.0809 following China’s decision to reduce the stamp duty on stock trading. This move is an attempt to strengthen the struggling stock market in the world’s second-largest economy.
However, the euro remains close to its lowest level in nearly 11 weeks, which it reached on Friday after European Central Bank President Christine Lagarde emphasized the need for restrictive policies.
Market predictions for a potential rise in the 3.75% rate in September are now evenly divided, based on Refinitiv data.
The Chinese yuan remained steady against the dollar, supported by the Chinese central bank’s regular setting of stronger-than-expected daily mid-points. The spot yuan remained largely unchanged at 7.2932 per dollar.
The Australian dollar, which is influenced by developments in China, rose by 0.1% to $0.6408. Throughout this month, concerns over China’s post-pandemic recovery have weighed on sentiment and negatively impacted the Australian dollar.
“Market confidence is unlikely to improve significantly until signs of a turnaround in China’s weakening economic momentum emerge,” said Tommy Wu, senior economist at Commerzbank.
The Japanese yen slightly weakened by 0.02% to 146.48 per dollar, remaining close to its more than nine-month low of 146.64 reached on Friday. Market participants continue to monitor the possibility of currency market intervention by Japanese authorities.
On Saturday, the governor of the Bank of Japan stated that the central bank would maintain its current ultra-easy policy as underlying inflation remains slightly below the target.