A downdraft in the dollar paused on Thursday as investors prepared for a series of central bank meetings next week, where hawkish holds on interest rates are anticipated in Japan, the US, and Europe. The currency market is positioned favourably toward the dollar, predicated on the expectation that the AI boom will sustain robust economic activity in the United States, thereby reinforcing the notion that elevated growth will contribute to interest rates remaining elevated for an extended period. Recent gains for sterling and the currencies of Canada, Australia, and New Zealand, all of which have recently reached their highest levels against the dollar in several weeks, indicate a slight reduction in dollar bets, although the movements observed on Thursday were minimal.
Sterling, which hit a one-month high of $1.3409 earlier in the week, has been supported by hotter-than-expected British inflation and held at $1.33955. The Australian dollar, which reached a three-week peak on Wednesday, is currently positioned above 70 US cents at $0.7025. Meanwhile, expectations for a rate hike next week in New Zealand have propelled the kiwi to a one-month high of $0.5709. Reserve Bank of Australia Deputy Governor Andrew Hauser stated on Wednesday that the inflation outlook appears “materially worse,” partly due to elevated oil prices, which has increased market speculation regarding the timing of the next interest rate hike in Australia, potentially as early as next month. The Bank of Canada is anticipated to raise interest rates next week, with the loonie finding support close to a one-month peak of C$1.4032 per dollar.
The euro and yen have established narrow trading bands, as the potential for intervention and the possibility of interest rate increases keep Japan’s currency fluctuating around 158 to the dollar. The euro has experienced a decline over the past month, becoming a preferred avenue for speculating on a stronger dollar, as fiscal uncertainties in France and the vulnerability of Europe’s energy sector draw in short sellers. French 10-year yields reached their peak since 2022 on Wednesday, as recent unrest throughout France, partially driven by reductions in public services, has underscored the political challenges associated with managing budget deficits. However, aside from a brief decline in the limited trading of Monday morning in Asia, the euro has remained relatively stable above $1.12.
“The euro cannot sell off-and it cannot rally,” said Spectra Markets’ president Brent Donnelly. “We are in a stalemate where the overhang of bad news just about perfectly offsets the market positioning.” The European Central Bank is anticipated to maintain its benchmark rate at 2.5% in the upcoming week, although an increase is virtually factored in before the conclusion of the year. Markets have anticipated a hold in Tokyo as well, with the next increase – to 1.5% – projected for early next year. The Federal Reserve is expected to maintain its position in October, with the Fed funds rate range set at 3.75-4%, while a rate hike is anticipated in December.
