Dollar Index Retreats From 2-Year High As Chances of September Fed Rate Cut Jump

Compounding the weakness in the U.S. Dollar at the end of the week was news of slower U.S. employment growth in July. Nonfarm payrolls increased by 164,000 jobs in July, fewer than the month prior, and wages increased modestly, the Labor Department said. Some traders believe the report increased the case for a Fed rate cut in September.
James Hyerczyk
US Dollar and Federal Reserve

The U.S. Dollar had a volatile week with the price action impacted the most by impulsive swings in U.S. Treasury yields. There was central bank activity in Japan and the U.K., but the Federal Reserve was the trigger for the bullish price action, while President Donald Trump was the biggest influence on the bearish side. There were some major U.S. economic reports, but they took a backseat to whether the Fed would stand pat, or cut rates in September.

Last week, September U.S. Dollar Index futures settled at 97.885, up 0.170 or +0.17%.

Weak Euro, British Pound Early Bullish Influence

The U.S. Dollar edged higher against a basket of currencies on July 29 and July 30 as traders prepared for the release of the U.S. Federal Reserve’s monetary policy statement and interest rate decision as well as the post-Fed meeting press conference on July 31. The greenback was boosted by a weaker Euro and British Pound.

Pressuring the Euro early last week was follow-through selling from the previous week in response to the dovish European Central Bank monetary policy statement and comments from ECB President Mario Draghi. The ECB is expected to cut its benchmark rate 0.10% and possibly start another round of quantitative easing. Rising risk that Britain will exit the European Union without a deal whacked the Sterling to a 28-month low.

Fed Cuts, Powell Sounds Hawkish, Dollar Rises

On July 31, the U.S. Dollar Index jumped after the Federal Reserve cut interest rates by 25 basis points for the first time since 2008. The index rose to a two-year peak against the Euro and a two-month high versus the Japanese Yen as U.S. Federal Reserve Chairman Jerome Powell ruled out a lengthy easing cycle after delivering the first rate cut since the financial crisis.

At a press conference after the Fed’s decision, Powell said “it’s not the beginning of a long series of rate cuts.” Following a volatile reaction in the stock and Treasury markets, Powell backtracked a little saying, “I didn’t say it’s just one rate cut.”

A day prior to the Fed’s meeting, traders had forecast a 35% chance of three cuts by the end of the year. After the Fed’s decision and Powell’s comments, that figure had fallen to 12%, according to the CME Group’s FedWatch tool. This helped make the U.S. Dollar a more attractive investment.

Trump Kills Dollar Rally with New Tariff Announcement

The U.S. Dollar Index fell from a two-month high after President signaled a potential escalation of trade tensions between the U.S. and China when he announced on August 1 an additional 10% tariff on $300 billion worth of Chinese imports starting September 1. The news sent Treasury yields plunging to three-year lows as financial market traders almost fully priced in a September rate cut. Weaker yields turned the greenback into an undesirable asset.

Mixed U.S. Jobs Report Weighs on Dollar

Compounding the weakness in the U.S. Dollar at the end of the week was news of slower U.S. employment growth in July. Nonfarm payrolls increased by 164,000 jobs in July, fewer than the month prior, and wages increased modestly, the Labor Department said. Some traders believe the report increased the case for a Fed rate cut in September.

According to the CME Group’s FedWatch tool, the chance of a September rate cut was 98.1% on Friday afternoon, a large jump from 56.2% a week prior, and 12% after the Fed announcements on July 31.

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