Dollar Strengthens Against Yen and Euro

By Gertrude Chavez-Dreyfuss and Sruthi Shankar

NEW YORK/LONDON (Reuters) – The dollar bounced against the yen and other major currencies on Monday, with investors focusing on upcoming U.S. inflation data following Friday’s mixed payrolls report. This report reinforced expectations that the Federal Reserve will likely implement a smaller interest rate cut of 25 basis points (bps).

The greenback rose for the first time in five sessions against the Japanese currency and for a second straight day against the euro.

“Currency markets are experiencing a mean-reversion: after Friday’s payrolls report and subsequent Fed speeches failed to support an emergency-scaled cut at next week’s central bank meeting, cross-currency rate differentials are reverting to longer-term ranges, boosting the dollar,” said Karl Schamotta, chief market strategist at Corpay in Toronto.

U.S. rate futures have fully priced in a 25 bps rate cut at the meeting scheduled for Sept. 17-18, with around a 25% chance of a larger, half-point cut, according to LSEG calculations. On Friday, pricing for a larger cut peaked at 50%.

For 2024, traders anticipate 113 bps of easing, up from roughly 100 bps.

Market Movements

In midmorning trading, the dollar was up 0.5% against the yen at 142. This recovery was a respite for the dollar after a challenging month, where it fell 2.1% in September so far. Against the euro, the dollar advanced, with the euro down 0.4% at $1.1043. This decline pushed the dollar index, which measures the greenback’s value against six major currencies, up 0.3% to 101.54.

Focus now shifts to Wednesday’s U.S. inflation report, which could influence expectations for the Fed’s September meeting outcomes.

Friday’s highly anticipated U.S. jobs data did not clarify whether the Fed would respond with a regular 25 bps cut or a more significant 50 bps cut at the upcoming meeting. Although employment increased less than expected in August, the jobless rate dipped and wage growth remained solid, indicating a cooling U.S. labor market that is not alarming.

Fed policymakers indicated they are prepared to initiate a series of rate cuts, acknowledging cooling labor market trends which could escalate without a policy adjustment.

ECB Meeting

The European Central Bank’s policy meeting is on Thursday, with a widely anticipated 25 bps cut to 3.50% expected, following a quarter-point reduction initiated in June.

Traders price a 52% likelihood of a similar move in December.

“We expect the ECB to cut rates gradually by 25 bps each quarter based on data, moving below 3%,” said Mohit Kumar, chief economist at Jefferies.

In additional currency pairs, the dollar gained 0.5% against the Swiss franc to 0.8483, recovering from an eight-month low reached on Friday. Meanwhile, the British pound fell to a more than two-week low of $1.3073, with upcoming economic data possibly influencing Bank of England policy expectations this year, currently down 0.3% at $1.3094.