Euro/dollar hits 5-week high, Bitcoin rebounds as Fed outlook dominates
FILE PHOTO: U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
Dec 3 : The dollar headed for its ninth straight decline on Wednesday as traders ramped up bets on Federal Reserve rate cuts following U.S. economic data and growing expectations for a more dovish central bank.
Fed Governor Christopher Waller said last week the labour market is weak enough to justify another quarter-point rate cut in December, while White House economic adviser Kevin Hassett emerged as the frontrunner to become the next Fed chair.
U.S. President Donald Trump said he would be announcing his pick as Fed chair early in 2026.
“Such an announcement, if it occurs this early, will create a ‘shadow Fed chair’ since current Fed Chair Powell’s term does not end until May," said Kristina Hooper, chief market strategist at Man Group.
"This could complicate the Fed’s ability to communicate monetary policy and could create some confusion for markets at a time when they need clarity,” she added.
However, market participants do not expect the Fed to lose its independence or become less effective in controlling inflation, a scenario that would raise bond risk premiums and could trigger a fresh selloff in U.S. assets.
"The term premium, the additional compensation that investors demand to hold a long-term bond instead of a series of short-term bonds, for the 10-year Treasury yield has remained largely unchanged since the start of the year," noted Atakan Bakiskan, U.S. economist at Berenberg.
"Similarly, long-term inflation expectations remain well-behaved, signalling an eventual return to the 2 per cent inflation target," he argued.
Investors await the ADP National Employment Report and data from the Institute for Supply Management (ISM) Services Purchasing Managers’ Index (PMI) later in the session.
Markets priced in an 89 per cent chance of a rate cut this month on Wednesday, according to the CME Group's FedWatch tool. The probability was at 30 per cent on November 19.
The dollar index, which measures the U.S. currency against six other units, was 0.37 per cent lower at 98.954, the lowest since October 29.
EURO RISES WITH TALKS OVER UKRAINE IN FOCUS
The euro rose 0.34 per cent to $1.1667, the highest since October 28.
Investors tracked progress in Ukraine peace talks, which could bolster energy security and cut costs. However, Wednesday's move was largely supported by the U.S. rate outlook.
The Kremlin said on Wednesday that President Vladimir Putin had accepted some U.S. proposals to end the war in Ukraine and rejected others and that Russia was ready to meet U.S. negotiators as many times as it takes to reach an agreement.
Analysts argued the euro could rally further if a ceasefire or full peace agreement is reached, particularly if elevated defense spending, which is expected to support the economy in coming years, remains in place.
Goldman Sachs' updated analysis confirmed that the European economic upside from a ceasefire is likely to be modest, unless a comprehensive and credible peace agreement can be reached.
BITCOIN EXTENDS REBOUND
Bitcoin, the biggest cryptocurrency by market value, rose to a two-week high of $93,965.64 on Wednesday after a 6 per cent rise in the previous session.
It slumped at the start of December after a woeful November when it fell more than $18,000, its largest dollar loss since May 2021, when a number of cryptocurrencies collapsed.
"Speculation that Kevin Hassett is emerging as the leading candidate for the next Fed chair is reinforcing that dovish bias, as investors view him as more comfortable with looser financial conditions," said Joel Kruger, markets strategist at LMAX Group, referring to the primary driver supporting crypto currencies.
YEN NOT FAR FROM DANGER ZONE FOR INTERVENTION
The dollar dropped 0.32 per cent to 155.39 against the Japanese yen on Wednesday after rising 0.25 per cent to 155.89 the day before as Bank of Japan Governor Kazuo Ueda provided the strongest signal yet of a rate hike later this month.
"The initial price action casts some doubt on whether an earlier BOJ rate hike will be sufficient on its own to reverse the yen weakening trend that has been in place since Sanae Takaichi won the Liberal Democratic Party (LDP) leadership election in early October," said Lee Hardman, senior currency economist at MUFG.
Prime Minister Takaichi is expected to favour an expansionary fiscal policy and lower rates.
"It may still require intervention if the yen continues to weaken," MUFG's Hardman added.
Analysts said Washington is likely to push back against any yen slide to or beyond 160.00, making intervention likely around that level, while noting U.S. Treasury Secretary Scott Bessent has repeatedly blamed BOJ policy for keeping the currency undervalued.
