Dollar in defensive mood after jobs data; spotlight on Fed

Singapore, May 3 (BNA): The dollar fell on Wednesday, as investors anticipate a US rate hike later in the day, but are unsure how long the Federal Reserve will keep policy tightening given the latest grim jobs data and the US debt ceiling. banking sector risks.

Data on Tuesday showed that U.S. job openings fell for a third straight month in March and layoffs increased to the highest level in more than two years, giving some hope that a downturn in the labor market can help the Fed’s fight against inflation.

The dollar index, which measures the greenback against six rivals, fell 0.128% to 101.710, after falling 0.245% on Tuesday, Reuters reported.

The Fed is widely expected to raise interest rates by 25 basis points when it wraps up its two-day meeting on Wednesday and investors’ focus will be on whether the Fed hints at a pause or further tightening.

Currency analyst at Bank of Singapore Moh Seong Sim said markets expect interest rate cuts by the end of the year due to stress in the US banking system. But, the finance secretary thought the Fed may seek to reduce the possibility of lower interest rates as data shows that while “the US economy is slowing, it is not slowing fast enough to bring inflation back to the 2% target”.

The Fed meeting comes as US financial markets reel from the weekend failure of San Francisco-based First Republic Bank as well as fears that the government may run out of cash after June 1 without raising the debt ceiling.

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The yield on the 10-year Treasury fell 13.3 basis points to 3.440% on Tuesday, while the yield on the 30-year Treasury fell 8.5 basis points. With Japan closed for the holiday, Treasury notes were not traded on Wednesday.

Blarina Orochi, chief US economist at T. Rowe Price, said the Fed is unlikely to be ready to announce an end to tightening for this cycle and risk data forcing its hand to make a U-turn.

“Squeeze on the banking sector is a factor that will come into play, but the Fed will likely conclude that a combination of market measures announced so far and a well-capitalized banking sector will give it the space to pursue lower inflation to the 2% target.”

Meanwhile, the euro rose 0.23% to $1.1024 after rising 0.2% overnight before the European Central Bank’s regular policy meeting on Thursday.

Data on Tuesday showed inflation accelerated in the eurozone last month, but core price growth unexpectedly eased, adding to arguments for a rate hike from the European Central Bank.

Based on pricing in the derivatives markets, traders believe there is roughly an 85% chance of a 25bps ECB hike on Thursday, and a 15% chance of 50bps.

Ryota Abe, an economist on global markets and treasury management at Sumitomo Mitsui Banking Corporation, said that markets have moved up interest rates in the euro area more than in the United States. “If the price divergence between the two regions becomes more pronounced, the DXY (dollar index) could drop below the 100 mark.”

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Elsewhere, the Australian dollar rose 0.11% to $0.667, a day after the Reserve Bank of Australia surprised markets with a rate hike to 3.85% and said more tightening may be needed to tame inflation.

The New Zealand dollar rose 0.40% to $0.623, while the British pound was last traded at $1.249, up 0.21% on the day.

The Japanese yen rose 0.40% to 136.01 per dollar, recovering some of its losses last week when the Bank of Japan stuck to its ultra-loose monetary policy.


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