Market News

The U.S. dollar slid on Tuesday as a slew of mixed economic data, some of it delayed and therefore dated, reinforced expectations that the Federal Reserve will cut interest rates next month.

In U.S. late-morning trading, the euro was up 0.5 per cent against the dollar at $1.1577, while sterling gained 0.6 per cent to $1.3184.

The dollar index, a measure of its performance against its major counterparts, fell 0.5 per cent to 99.746 following the release of September retail sales and producer price data, after initially holding on to last week’s gains when the index rose nearly 1 per cent.

“Producer prices were stable and retail sales showed a modest consumer slowdown, and this keeps a December rate cut on the table,” said Scott Helfstein, head of investment strategy at Global X, in emailed comments.

Data showed U.S. retail sales rose 0.2 per cent in September, less than the 0.4 per cent forecast by economists polled by Reuters and slowing from an unrevised 0.6 per cent gain in August.

Producer prices, on the other hand, increased 0.3 per cent, in line with expectations, after an unrevised 0.1 per cent drop in August; however, at the core level prices inched up 0.1 per cent, below the consensus forecast of 0.2 per cent.

In addition, the latest U.S. consumer confidence number declined to 88.7 in November from an upwardly revised 95.5 in October, further hurting dollar sentiment.

Economists polled by Reuters had forecast the index edging down to 93.4 from the previously reported 94.6 in October.

“More worries about what lies ahead … hence, putting purchases for major items on hold,” wrote Jennifer Lee, senior economist at BMO, in emailed comments.

The economic data followed dovish comments from policymakers in recent days that helped cement rate-cut expectations.

On Monday, Fed Governor Christopher Waller said the job market was weak enough to warrant another quarter-point rate cut in December, though action beyond that depended on a flood of data delayed by the federal government shutdown.

Waller’s comments followed similar remarks by New York Fed President John Williams on Friday.

Traders are now pricing in an 83 per cent chance of a cut next month, up from 50 per cent a week earlier, CME FedWatch showed. The huge swing underscores the challenge the market faces in pricing near-term rates in the absence of economic data caused by the longest-ever U.S. government shutdown, which ended on 14 November.

Francesco Pesole, currency analyst at ING, said some “year-end rebalancing flows before Thanksgiving may be getting in the way” of dollar weakening.

However, he added in a note to clients: “Unless markets have a hawkish rethink, the dollar looks too strong relative to short-term rate differentials at these levels, and we see some material downside risks.”

In other currency pairs, the yen, which has been on the defensive since hitting 10-month lows last week, firmed on Tuesday to 156.055 per dollar, leaving the dollar down 0.5 per cent against the Japanese currency.

Investors have been waiting for any signs of official buying from Tokyo to support its currency, which has weakened by nearly 10 yen since the start of October after fiscal dove Sanae Takaichi took over as Japan’s prime minister.

Pesole said thinner liquidity around Thanksgiving could present good conditions for the Bank of Japan to intervene in USD/JPY, ideally after a market-driven correction in the pair.