US dollar retreats as rate cut expectations grow

US currency slides to one-week low as economic data bolsters predictions of Fed easing.

US dollar retreats as rate cut expectations grow
US Dollar

After having a storming start to the week, the US dollar is in retreat while the Japanese yen is being squeezed against major currencies.

The US dollar slipped on Thursday, hitting a one-week low as investors digested recent economic data pointing towards potential interest rate cuts by the Federal Reserve in the coming months.

The disappointing US services growth figures on Wednesday fueled expectations of an imminent monetary policy easing by the Federal Reserve, dealing the greenback a blow against its major counterparts.

Despite Fed officials, including Chair Jerome Powell, reiterating the need for more data before rates are cut, futures pricing currently implies around a 60% probability of a reduction in June.

The Japanese yen remains under pressure against major currencies, despite currently trading almost flat against the dollar after hitting a 34-year low of 151.975 last week. The Bank of Japan's historic shift away from negative rates has failed to revive the currency. Stark yield differentials are prompting Japanese investors to seek higher returns overseas, depriving the yen of repatriation support.

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Elsewhere, the euro gained 0.15% to $1.0854, buoyed by softer-than-expected European inflation data on Wednesday. The Swiss franc slipped around 0.4% against the euro and dollar after sluggish consumer price index figures.

The Australian dollar climbed above its 200-day moving average to a two-week high of $0.6587, while the New Zealand dollar rose 0.5% to $0.6038, as traders positioned for potential rate cuts by the Reserve Bank of New Zealand starting in August.

Looking ahead, while today's data docket is light, all eyes will be on the latest US employment figures due on Friday.

Ultimately, little has fundamentally shifted besides markets wagering on if and when the Fed will ease monetary policy. The dollar's current vulnerability may prove transitory until the central bank's rate cut path becomes clearer.

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