Dollar dominates as traders temper rate cut hopes

The US dollar flexed its muscles on Friday, heading for its biggest weekly gain since May as investors pared back expectations for US interest rate cuts this year.

The greenback’s resurgence has pressured the euro, which fell 0.3% ahead of US jobs data. The yield-sensitive yen, typically a safe-haven asset, dropped 0.3% to 145.07, a three-week low.

Traders now see a 62% chance of a March rate cut versus an 86% probability last week, CME FedWatch futures showed. Earlier optimism around double the amount of 2023 rate reductions has faded in the new year.

The dollar index, measuring the greenback against major currencies, rose 0.24% to 102.68, a three-week high. The gauge has climbed 1.3% this week, on pace for its best week since mid-May.

Supporting the dollar, December’s US private payrolls increased more than expected, signalling enduring economic vigour.

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The euro has ceded 1.1% this week, its largest weekly fall since early May, halting a three-week rally.

Slower Japanese service-sector growth last month may restrain the Bank of Japan from soon changing its ultra-loose policy, especially following this week’s earthquake.