Dollar holds near three-month high as rate cut expectations diminish

Dollar in focus: The US dollar remains close to its three-month peak on Tuesday, bolstered by elevated Treasury yields and increasing beliefs that the Federal Reserve will not aggressively cut interest rates this year.

The dollar index, which measures the US currency against six major counterparts, stood at 104.42, reaching 104.60 on Monday, its highest level since November 14. Year-to-date, the index has gained 3 per cent, rebounding from a 2 per cent decline in 2023.

Monday's data revealed an acceleration in US services sector growth for January, supported by rising new orders and rebounding employment figures. These strong indicators signal a robust start to the year for the economy, following last week's impressive jobs report.

The series of positive economic data from the US has dispelled any lingering hopes of early and aggressive interest rate cuts by the Federal Reserve. Fed Chair Jerome Powell and other policymakers have also pushed back against such notions.

Since the beginning of the year, traders have been reducing their bets on rate cuts, with the CME FedWatch tool indicating only a 15 per cent chance of a cut in March, compared to a 69 per cent chance at the start of the year. Expectations for total rate cuts this year have decreased to 115 basis points, down from around 150 bps anticipated in early January.

Christopher Wong, a currency strategist at OCBC in Singapore, noted, “There may still be a bit of room to scale back (more) but it's likely limited given that the disinflation trend in the US is becoming more entrenched and that labor market tightness is gradually easing.”

Investors in Asia are closely watching the Reserve Bank of Australia's policy decision, widely anticipated to keep rates unchanged. Comments from Governor Michele Bullock will be closely scrutinised. 

Betting for the first rate cut from the RBA has been pushed back to August from June, with economists polled by Reuters also expecting the central bank to maintain rates throughout the second half of the year.

The Australian dollar remained stable at $0.64835 ahead of the decision, lingering near its lowest level since November 17.

In other currency news, the euro edged up 0.02 per cent at $1.0743, while the pound saw a modest 0.06 per cent increase at $1.254, though it remained close to a seven-week low. 

Despite some positive economic data, the pound's decline on Monday persisted, possibly delaying rate cuts.

The Japanese yen strengthened marginally to 148.56 per dollar, hovering near a two-month low of 148.90 reached on Monday. 

Japan's persistent decline in real wages and household spending continues to reflect the challenges of inflation outpacing wage recovery, thus weighing on consumer spending.

(With Reuters Inputs)