Ankur Banerjee
SINGAPORE (Reuters) – The dollar weakened and the euro and yen rose on Friday as investors remained nervous ahead of a central bank interest rate cut next week, with focus on the Federal Reserve and the size of the expected cut.
The Fed is almost certain to cut interest rates next week, but uncertainty over whether the cut will be by 25 basis points or 50 basis points is making investors nervous, weighing on the dollar.
Analysts pointed to reports in the Financial Times and Wall Street Journal suggesting the Fed's decision will be nuanced as one reason traders are stepping up bets on a bigger rate cut next week.
Christopher Wong, currency strategist at OCBC, said rising U.S. jobless claims figures released on Thursday, along with a Wall Street Journal article on the Fed's interest rate-cutting dilemma, have rekindled expectations of a big rate cut at the September meeting.
Traders now see a 43% chance of the Fed cutting rates by 50 basis points, up from 27% a day earlier, and a 57% chance of a 25 basis point cut, according to the CME FedWatch tool. Markets are pricing in 113 basis points of cuts over the three meetings remaining this year.
The European Central Bank (ECB) cut interest rates on Thursday but ECB President Christine Lagarde softened prospects for further rate cuts next month, sending the euro higher and holding firm at the start of trading on Friday.
In addition to the Fed, the Bank of England and the Bank of Japan will also hold policy meetings next week.
The euro was up slightly at $1.1083 after rising 0.57% on Thursday, while the greenback, a benchmark measure of the greenback against six major currencies including the euro, was at 101.11.
A series of mixed U.S. economic data released this week has confounded interest rate forecasts. A report on Thursday suggested layoffs remained low despite a slowing labor market, while other indicators showed producer prices rose slightly more than expected in August amid a recovery in services prices.
The data is unlikely to prompt the Fed to pause its rate cuts, but “it should serve as a reminder of the importance of balancing both sides of the Fed's mission – employment and inflation,” said Ryan Brandom, head of North American global capital markets at Validus Risk Management.
“The risk remains that inflation will not return to its target as easily as everyone, including the Fed, expects.”
The yen rose 0.3% to 141.38 yen to the dollar in early morning trading, hovering near the eight-and-a-half-month high of 140.71 yen it hit on Wednesday before the Bank of Japan meeting.
Bank of Japan board member Naoki Tamura said on Thursday the central bank will need to raise interest rates to at least 1% in the second half of next fiscal year, but added that it will likely do so slowly and in stages.
Sterling rose 0.1 percent to $1.31415 ahead of the Bank of England's meeting next week, with futures markets valuing interest rates at about an 80 percent chance of them remaining on hold after a 25-basis-point cut in August.
