Dollar strengthens as traders rethink Fed rate cut projections

US Dollar rises: The US Dollar saw an upward trajectory on Thursday as investors reevaluated their expectations for Federal Reserve rate cuts in the coming year. Market caution lingered following a robust risk rally in the previous month.

In Asian trading, the Dollar reached a more than two-week high against the Yen, with Japan back in full swing after an extended New Year break. The Dollar peaked at 143.90 against the Yen and settled at 143.75, marking a jump of over 0.9 per cent against the Japanese currency in the prior session, its most substantial gain since October.

The Australian Dollar, often reflective of risk appetite, struggled to recover from Wednesday's two-week low of $0.6703, closing at $0.6744. Similarly, the New Zealand Dollar, sensitive to risk, traded at $0.6266, after hitting a two-week low of $0.6221 in the previous session.

Minutes from the Federal Reserve's December policy meeting, released on Wednesday, revealed officials' confidence in controlling inflation and concerns about the potential negative impact of an "overly restrictive" monetary policy on the economy. However, no clear indications were given on the timing of potential rate cuts, with policymakers still emphasising the need for rates to remain restrictive.

Christopher Wong, a currency strategist at OCBC, highlighted that the messaging around elevated rates prompted a second look at the aggressive rate cut expectations the markets were pricing. Factors such as global growth concerns and the unwinding of aggressive bets on Fed cuts contributed to the US Dollar's rebound.

Against a basket of currencies, the greenback rose 0.03 per cent to 102.43, nearing a three-week peak of 102.73 from the previous session. The euro experienced losses, edging up 0.09 per cent to $1.0931, while Sterling remained close to its recent three-week low at $1.2667.

Data released on Wednesday indicated a further contraction in US manufacturing in December, albeit at a slower pace, and a decline in job openings for the third consecutive month in November, signaling easing labor market conditions.

Recent data pointing to a cooling US economy has reinforced expectations of Fed rate cuts in 2024 as inflation comes under control. However, traders remain divided over the pace and scale of easing by the central bank. The CME FedWatch tool now shows a roughly 72 per cent chance of the Fed initiating rate cuts in March, compared to an 87 per cent chance a week ago.

The closely watched US nonfarm payrolls report, scheduled for Friday, is anticipated to provide further clarity on the Fed's room for rate adjustments.

In geopolitics, Hezbollah in Lebanon and the Israeli army expressed intentions to avoid an escalation of war beyond the Gaza Strip, following a drone strike that killed a Palestinian Hamas deputy leader in Beirut.

(With Reuters inputs.)