Dollar clings to 7-week highs as traders weigh U.S. rate outlook By Reuters

By Ankur Banerjee

SINGAPORE (Reuters) – The dollar clung to seven-week highs against major currencies on Tuesday as investors weighed the outlook for U.S. interest rates after a strong jobs report last week jolted bets for deep cuts of rates, while escalating tensions in the Middle East affected risk sentiment.

Traders have drastically changed their expectations of monetary easing from the Federal Reserve this year.

Markets are no longer fully pricing in a rate cut in November and assign an 86 percent chance to a 25 basis point (bps) cut, CME’s FedWatch tool showed. Just 50 bps of easing is priced in by December, down from more than 70 bps just a week earlier.

This kept the dollar on the front foot and rose to a multi-week high against the euro, sterling and yen.

which measures US unity against major rivals, last touched 102.41, just below the seven-week high of 102.69 it hit on Friday.

A shallower path of Fed tapering, coupled with strong data and the prospect of a “no-land” scenario helped support the greenback, said Kieran Williams, head of Asia FX at InTouch Capital Markets.

“While the USD has room to strengthen from here, given the post-FOMC shock re-pricing, other catalysts may be needed.”

The President of the Federal Reserve Bank of St. Louis Governor Alberto Musalem said on Monday he supported more interest rate cuts as the economy moves forward on a healthy path, while noting that it was appropriate for the central bank to be cautious and not overdo monetary easing.

“Further gradual reductions in the policy rate are likely to be appropriate over time,” the official said.

The benchmark remained above 4 percent in Asian hours, after hitting Monday’s level for the first time in two months, as traders trimmed bets on big rate cuts. (US/)

Investors’ focus this week will be on the inflation report due on Thursday, as well as the minutes of the Federal Reserve’s September meeting, scheduled for release on Wednesday. Markets in China are also set to open after a week-long holiday.

China firmed slightly at 7.0594 per dollar in early trade.

The euro touched $1.098175 in early trade, not far from the seven-week low of $1.09515 it hit last week. Sterling was at $1.3095, close to the more than three-week low of $1.30595 it hit on Monday.

The yen was slightly stronger at 147.795 per dollar in early trade, also dipping to a seven-week low of 149.10 months, as traders considered the interest rate path the Bank of Japan is likely to follow in the short term.

New Japanese Prime Minister Shigeru Ishiba stunned markets last week when he said the economy was not ready for further interest rate hikes, an apparent shift from his previous support for the BOJ, which has run decades of extreme monetary stimulus.

Those comments pushed the yen lower and cast doubt on how aggressive the BOJ would be in raising rates.

In other currencies, the Australian dollar was slightly stronger at $0.6768.

The New Zealand dollar was 0.3% higher at $0.6144 ahead of Wednesday’s monetary policy decision. Most economists in a Reuters poll last week said the Reserve Bank of New Zealand would cut interest rates by 50 basis points.