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The dollar index reached its highest level in two weeks as traders recalibrated expectations for Federal Reserve rate cuts. The euro and yen weakened, while long-term U.S. Treasury yields rose.
The dollar index, which measures the greenback against a basket of major peers, rose to 101.79 on Monday, marking its highest level since 20 August. This surge in the dollar’s strength comes as traders temper expectations for a significant rate cut by the Federal Reserve in September, following recent economic data.
The dollar’s climb was bolstered by a rise in long-term U.S. Treasury yields, which reached their highest point since mid-August. This uptick in yields followed the release of stable U.S. inflation data, which lessened the pressure on the Federal Reserve to implement a substantial 50 basis points (bps) rate cut at their upcoming meeting on 18 September.
Against the yen, the dollar strengthened to 146.60, its highest level since 21 August, before settling slightly at 146.29. Meanwhile, the euro dipped to $1.0430, its lowest since 19 August, as traders increasingly favoured the dollar.
The shift in market sentiment reflects a recalibration of expectations regarding the Federal Reserve’s policy trajectory. A week ago, traders saw a 36% chance of a 50-bp rate cut, but this has now decreased to 33%, with a higher probability placed on a more modest 25-bp reduction.
Despite the U.S. public holiday on Monday, which is expected to slow trading activity, the week ahead is packed with significant macroeconomic data releases, culminating in the highly anticipated U.S. non-farm payrolls report on Friday. Economists are forecasting the addition of 165,000 jobs in August, up from the previous month’s 114,000, with the unemployment rate expected to tick down to 4.2%.
A strong jobs report would bolster confidence in the U.S. economy's trajectory, potentially reinforcing expectations for a 25-bp rate cut. However, some analysts, like IG’s Tony Sycamore, caution that the dollar's recent strength may not be sustained, particularly against the yen unless it breaks through the 152.00 resistance level.
With both the Federal Reserve and the European Central Bank anticipated to ease monetary policy this month, the outlook for the euro against the dollar remains uncertain. As the week progresses, the focus will remain on key economic indicators that could further influence the Fed’s decision-making process.
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