The U.S. Dollar rose on Tuesday as last week’s sharp sell-off was seen as overdone in the short term, while the Euro was hit by weak German data and the Australian Dollar slid after the country’s central bank raised interest rates but indicated that the hike was the last in the current tightening cycle.
The Japanese yen also weakened back above 150 against the greenback, a level that has kept traders on edge in recent weeks as they look for signs of intervention from Tokyo.
The dollar index, which tracks the greenback against six major rivals, was up 0.26% at 105.52. It fell 1.4% last week, its biggest weekly drop since mid-July.
“This dollar bounce we’re having yesterday and today is really a correction to what happened last week, which I would say was a one-two punch between the Fed and the jobs data,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
The U.S. currency fell last week after Federal Reserve Chairman Jerome Powell struck a more dovish tone than expected at the conclusion of the central bank’s two-day policy meeting on Wednesday, when it left interest rates unchanged.
A weaker-than-expected U.S. jobs report on Friday added to the dollar’s weakness.
“If you look at the percentage of currencies that were down against the dollar over the last 26 weeks, it was approaching 100%, and the data also showed very long dollar positioning … So we got a reversal of some of those positions triggered by the jobs report,” said Chester Ntonifor, foreign-exchange strategist at BCA Research.
Traders are now pricing in only a small chance of another rate hike by the Fed, and see three 25-basis-point rate cuts by next November.
As the U.S. economy slows, the dollar may also see further weakness.
Data next week is expected to show softening consumer price inflation and a decline in retail sales, which “feeds into the headwinds that people are talking about – the resumption of student loans, higher interest rates biting the consumer,” Chandler said.
“The dollar’s rally, especially since July, has been fueled by divergence, and now we’re going to get convergence – but not because of good news from overseas, but more because we’re getting worse news from the U.S.,” he added.
This week, investors are also focused on comments from Fed officials, including Powell, who is scheduled to speak on Wednesday and Thursday.
Fed governors Christopher Waller and Michelle Bowman both noted the third quarter’s “blowout” growth, at an annualized rate of 4.9%, in comments on Tuesday.
Minneapolis Fed President Neel Kashkari also said the U.S. central bank may need to do more to bring inflation back to its 2% target, while Chicago Fed President Austan Goolsbee said the Fed has made significant progress in its fight to reduce price pressures.
The euro fell 0.20% to $1.0695 after data showed German industrial production fell more than expected in September.
“The data comes after the German manufacturing PMI showed a sharp contraction in October and suggests that the sector remains under pressure and is acting as a drag on the German economy,” said Fiona Cincotta, senior financial markets analyst at City Index.
The Australian dollar fell sharply after the Reserve Bank of Australia (RBA) raised interest rates by 25 basis points as expected to combat stubborn inflation, but indicated further tightening was unlikely.
The Australian currency was last down 0.88% at $0.6431, on track for its biggest one-day percentage drop in a month. It hit a three-month high of $0.6523 on Monday.
The U.S. dollar was up 0.25% at 150.43 Japanese yen.
The yen weakened to 151.74 per dollar last week, approaching the October 2022 lows that spurred several rounds of dollar selling intervention.
