LONDON : The dollar inched higher on Friday after falling the day before as a surge in U.S. jobless claims and a modest tick up in inflation kept investors zeroed in on likely Federal Reserve interest rate cuts next week and beyond.
The dollar index was up 0.1 per cent at 97.66, but it was still on track to record a weekly fall of 0.1 per cent, its second consecutive weekly decline.
On Thursday, data showed the biggest weekly increase in four years in the number of Americans filing new applications for jobless benefits.
That overshadowed U.S. consumer inflation data for August, which showed prices rising at the fastest pace in seven months but with increases still modest and broadly in line with expectations.
While the mixed data might add some wrinkles to the Fed’s policy deliberations next week, investor focus is mostly centered on rate cut prospects for now.
“The hurdle to faster cuts is labour market weakness as long as inflation stays well behaved,” said Dominic Bunning, head of G10 FX strategy at Nomura.
“I still think it’s a very high bar to cut by 50 basis points next week,” he added.
Pricing of Fed fund futures indicates that the market believes the Fed is certain to cut its key interest rate by 25 basis points (bps) on September 17.
However, traders have reined in bets on a larger 50 bps rate cut next month, with pricing implying a shallower path of easing before the end of the year than anticipated earlier, according to the CME Group’s FedWatch tool.
The yield on benchmark 10-year Treasury notes rose four bps to 4.0433 per cent compared with its U.S. close of 4.011 per cent, having fallen below 4 per cent for the first time since April on Thursday.
The euro was down less than 0.1 per cent at $1.1725 after rising the day before as traders curbed their bets on another European Central Bank rate cut this cycle, now seeing another move at less than 50 per cent.
The ECB kept its key interest rate on hold at 2 per cent for a second straight meeting on Thursday, with chief Christine Lagarde saying that the bank remains in a “good place”, adding that risks to the economy had become more balanced than before.
Fitch Ratings is expected to give its verdict on French public finances after markets close on Friday following the confidence motion on September 8.
“Fitch’s sovereign rating model is, if anything, likely to indicate a small improvement,” analysts from Citi wrote in a research report.
“Going explicitly against the direction of its model and ‘manually’ downgrading the rating would require the agency to come to the conclusion that the balance of power between stakeholders of public funds has tilted further away from financial creditors since the last rating decision in spring,” they wrote.
Against the yen, the dollar was trading 0.4 per cent stronger at 147.76 after the U.S. and Japanese governments issued a joint statement on Friday, which reaffirmed that exchange rates should be “market determined” and that excess volatility and disorderly moves in exchange rates were undesirable.
Sterling traded at $1.3553, slipping 0.2 per cent after data showed the British economy stagnated in July.
The offshore yuan was last at 7.1234 yuan per dollar, weakening 0.1 per cent, while the Australian dollar was a touch softer at $0.6645, although it remained near a 10-month high.
