The U.S. dollar exhibited a steady performance on Tuesday, maintaining its position as investors awaited the outcome of a significant meeting between President Donald Trump and Ukrainian President Volodymyr Zelenskiy. Market participants were also weighing the implications of potential adjustments in Federal Reserve interest rates following recent dovish remarks from Fed officials.
Comments from Fed Governor Christopher Waller indicated that a tepid job market may justify another quarter-point rate cut in December. However, he noted that any further decision-making hinges on a wealth of economic data, which has been delayed due to the ongoing federal government shutdown. These sentiments echoed those expressed by New York Fed President John Williams just days earlier.
In a notable shift, traders are now assigning an 81% probability to a rate cut next month, compared to just 42% a week prior, according to CME FedWatch. This significant leap reflects the challenging environment for accurately predicting near-term rate changes amid the extraordinary duration of the government shutdown, which concluded on November 14.
Despite the growing likelihood of an imminent rate cut, the dollar’s value remained largely unchanged against major currencies. The euro was recently valued at $1.1530 following a slight overnight increase, while the British pound rose approximately 0.2% to $1.3115. The U.S. dollar index, which measures the strength of the dollar against a basket of other major currencies, was stable at 100.13, consolidating gains from the previous week when it had surged nearly 1%.
Francesco Pesole, a currency analyst at ING, noted that “year-end rebalancing flows before Thanksgiving may be getting in the way” of any significant dollar weakening. He further indicated in a client note that unless markets adopt a more hawkish stance, the dollar appears overvalued in relation to short-term rate differentials, suggesting potential downside risks ahead.
Divisions among Fed officials persist regarding monetary policy direction, especially given the insufficient availability of economic data. Nonetheless, investor sentiment received a boost due to improving dynamics in the U.S.-China relationship, with President Trump asserting that relations with China were “extremely strong” following a recent call with President Xi Jinping.
Meanwhile, the Japanese yen remained on the back foot, trading at 156.51 per dollar and not far from a 10-month low of 157.90 reached the previous week. Investors are vigilantly watching for any indications of official currency interventions from Tokyo, especially as the yen has depreciated nearly 10 yen since early October, following the ascendance of fiscal dove Sanae Takaichi as Japan’s prime minister.
Pesole also highlighted that thinner liquidity leading up to Thanksgiving might provide a conducive environment for the Bank of Japan to intervene in the USD/JPY currency pair, ideally following a market-driven correction. However, he expressed skepticism that U.S. data releases later on Tuesday could trigger such a correction.
Across the Pacific, the New Zealand dollar slipped to $0.5595, having plummeted more than 2% this month in anticipation of an expected rate cut from the Reserve Bank of New Zealand on Wednesday. The Australian dollar, on the other hand, traded at $0.6453, reflecting a minor decline of 0.15% for the day.
