Karen Brettel
NEW YORK (Reuters) – The dollar rebounded from a 14-month low against the euro in choppy trading on Wednesday, but investors maintained their bet that the Federal Reserve will deliver another big interest rate cut at its November meeting as optimism about the labor market wanes.
The yuan also weakened after initially rising on the news as doubts grew about the effectiveness of China's new economic stimulus measures, which were seen as overdone.
The dollar fell sharply on Tuesday after data showed U.S. consumer confidence fell to its steepest drop in three years in September amid growing concerns about the labor market.
“A narrowing labour market gap, an indication of the state of supply and demand in the job market, bodes very poorly for the U.S. economy,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“The market is interpreting this as a sign that the Fed is very likely to deliver a second emergency rate cut at its November meeting,” he added.
According to CME Group's FedWatch tool, traders are now pricing in a 59% chance of a 50 basis point cut at the Fed's Nov. 7 meeting, up from 37% a week ago, and a 41% chance of a 25 basis point cut.
The Fed began a series of expected rate cuts last week with larger-than-usual half-percentage-point cuts that Fed Chairman Jerome Powell said were aimed at signaling policymakers' determination to keep unemployment low now that inflation has moderated.
Sales of new single-family homes in the U.S. fell more than expected in August, according to data released Wednesday.
The main focus for the U.S. economy this week will be the release of August's personal consumption expenditures index on Friday.
The euro briefly hit $1.1214, its highest since July 2023, before trading down 0.41% at $1.1134. The dollar index rose 0.68% to 100.91. It briefly fell to 100.21, matching the low of September 18, its lowest since July 2023. The U.S. dollar rose 1.03% to 144.68 yen, hitting 144.75 yen, its highest since September 3.
Jane Foley, senior foreign exchange strategist at Rabobank, said China's economic stimulus measures initially led to a stronger euro, but the euro's resilience was also due in part to expectations that an improving Chinese demand outlook would spread to Germany and Europe.
He said the euro was holding up “extremely well” against the dollar this week despite weak economic data in Germany and concerns over the French budget.
France's new Budget Minister Laurent Saint-Martin told lawmakers in Parliament on Wednesday that this year's budget deficit risks exceeding 6 percent of economic output.
The Chinese yuan gave back the previous day's gains, a day after the People's Bank of China announced its biggest stimulus package since the pandemic to steer the economy out of a deflationary slump and back to the government's growth targets.
In offshore trading, the dollar rose 0.33% from the previous day to 7.033 yuan per yuan. The yuan earlier hit 6.9952 yuan, its highest since May 2023.
Riskier currencies, including emerging market currencies that had rallied on stimulus packages, also fell.
“Many risk-sensitive asset classes have fundamentally declined from their post-announcement levels as investors remain skeptical that the announced measures will be successful in stimulating growth in the real economy,” Schamotta said.
The Australian dollar, seen as a more liquid alternative to the yuan, also fell on the back of weaker inflation in Australia, where domestic consumer prices slowed to a three-year low in August and core inflation hit its lowest since early 2022.
The Australian dollar was last down 0.99% to $0.6823, having briefly hit $0.6908, its highest since February 2023.
In cryptocurrencies, Bitcoin fell 1.41% to $63,324.
(Reporting by Karen Brettle; Additional reporting by Ray Wee and Linda Pasquini; Editing by William MacLean and Jonathan Oatis)
