The dollar was steady against the euro on Wednesday and gained against the yen as it consolidated after a sharp sell-off last week on growing confidence that the Federal Reserve has ended its cycle of interest rate hikes.
Traders also remained on alert for possible intervention in the Japanese currency as it rose above 151 against the dollar, its weakest level in a week.
Many economists and analysts expect the U.S. economy to slow in the fourth quarter, making further rate hikes less likely and denting the appeal of the greenback, which has benefited from the relative strength of the U.S. compared with other major economies.
“The dollar is vulnerable to weaker data going forward,” said Shaun Osborne, chief currency strategist at Scotiabank in Toronto. “We’re moving into sort of a sell dollar rally environment after the buy dollar dip trend that we’ve really seen since the middle of the year.”
That said, the dollar could continue to rally in the short term as it recovers from last week’s sell-off, which was seen by some as overdone.
“Basically, it’s a period of consolidation for the US dollar in general… That’s probably going to continue for a bit longer,” Osborne said.
The greenback suffered after Fed Chair Jerome Powell was interpreted as striking a dovish tone at the end of the Fed’s two-day meeting last Wednesday, when it left interest rates unchanged.
Powell did not comment on monetary policy in a speech on Wednesday. He is scheduled to speak again on Thursday.
Futures point to a roughly 17% chance of another hike by January, but are pricing in an 18% chance that a cut could come as early as March, according to the CME FedWatch tool.
The Dollar Index was last up 0.05% at 105.58. It fell 1.4% last week, its biggest weekly decline since mid-July.
Friday’s weaker-than-expected October jobs report added to last week’s sell-off. The next major U.S. economic releases are consumer price inflation and retail sales data due next week.
The euro was up 0.02% at $1.0702.
The single currency was hit earlier on Wednesday by data showing that retail sales in the bloc fell 0.3% in September from the previous month.
“The mixed outlook for consumer and investment spending leaves the eurozone very close to recession,” said Wells Fargo economist Nick Bennenbroek.
The dollar gained 0.41% to 151.03 Japanese yen, heading back toward levels that have investors on the lookout for currency intervention. It hit a one-year high of 151.74 last week.
“It’s clear that we are back in the intervention space,” said ING FX strategist Francesco Pesole.
“The rate of change in the last two sessions has been quite substantial. If we see the dollar-yen rise by another substantial amount today, then the intervention alarm bells will start ringing very loudly.”
In the FX options market, however, positions are more skewed toward expectations that the yen will strengthen from here.
The one-month dollar/yen risk reversal, which is used to gauge bullish or bearish sentiment in currency markets, showed a preponderance of puts – a bet that the pair will fall – over calls on Wednesday, currently at -0.65. That’s the highest level since September 2022.
A negative risk reversal means that the volatility of put options is greater than the volatility of similar call options.
The British pound, which earlier this week hit a seven-week high against the dollar above $1.24, was last down 0.12% at $1.2283.
The Australian dollar fell another 0.57% to $0.6400, after dropping 0.8% in the previous session – its biggest one-day drop in about a month.
The Reserve Bank of Australia (RBA) raised interest rates to a 12-year high on Tuesday, ending four months of steady policy, but softened its tightening bias to make it more dependent on incoming data.
