Dollar weakens as traders add to big Fed rate cut bets By Reuters

By Ankur Banerjee

SINGAPORE (Reuters) – The dollar softened on Friday, with the euro and yen rising as investors remained on edge ahead of next week’s central bank bonanza, where the focus is on the Federal Reserve and the size of its expected interest rate cut.

While the Fed is almost certain to cut rates next week, uncertainty over a 25 basis point or 50 basis point cut has kept investors on edge and weighed on the dollar.

Analysts pointed to media reports in the Financial Times and Wall Street Journal suggesting the Fed’s decision would be a close call as one of the reasons traders will add to bets on a big rate cut next week.

Higher US jobless claims data released on Thursday and the Wall Street Journal article on the Fed’s rate cut dilemma revived bets on a jumbo cut at the September meeting, according to Christopher Wong, currency strategist at OCBC.

Traders have a 43 percent chance the Fed will cut rates by 50 bps, up from 27 percent a day earlier, with a 57 percent chance of a 25 bps cut, CME’s FedWatch tool showed. Markets are pricing in 113 bps of relaxation from three meetings left this year.

The European Central Bank cut interest rates on Thursday, but ECB President Christine Lagarde played down expectations for a further cut next month, sending the euro higher, with the single currency holding on to gains in early trading on Friday.

In addition to the Fed, the Bank of England and the Bank of Japan hold policy meetings next week.

The euro was slightly higher at $1.1083 after rising 0.57 percent on Thursday, leaving the , which measures the U.S. currency against six rivals, including the euro, at 101.11.

A series of mixed U.S. economic reports this week confounded expectations for rates, with a report on Thursday suggesting that layoffs remained subdued even as the labor market slowed, while other data showed that producer prices rose slightly more than expected in August amid a rebound in the cost of services.

The data likely won’t cause the Fed to pause on rate cuts, “but it should serve as a reminder of the importance of balancing both sides of its mandate (employment and inflation),” said Ryan Brandham, chief global capital markets, North America. at Validus Risk Management.

“Risks remain that inflation will not return to target as easily as everyone, including the Fed, seems to expect.”

The yen was 0.3 percent higher at 141.38 per dollar in early trade, nearing an eight-and-a-half-month high of 140.71 it hit on Wednesday ahead of the BOJ meeting.

BOJ board member Naoki Tamura said on Thursday that the central bank must raise interest rates to at least 1 percent from the second half of the next fiscal year, but added that it would likely raise rates slowly and in several stages.

Sterling was 0.1% higher at $1.31415 ahead of next week’s BoE meeting, where futures markets are implying about an 80% chance that interest rates will remain on hold after a rate cut 25 basis points in August.