Dollar rises for third day before Fed Chair Powell speech

The dollar’s rebound continued on Wednesday as some Federal Reserve policymakers indicated the possibility of further rate hikes. Traders are now awaiting a speech from Chair Jerome Powell to gain insight into the central bank’s future policy direction. Despite hitting a seven-week low earlier in the week due to the Fed’s decision to maintain its policy rate and weaker U.S. labor market data, the dollar has stabilized as market participants remain divided on whether U.S. rates have peaked and when the Fed might start easing policy. Futures currently suggest a 16% chance of another rate hike by January, but also a 21% chance of rate cuts as early as March, according to the CME FedWatch tool. The U.S. dollar index, which experienced its sharpest weekly decline in four months last week, rose 0.2% to 105.75 and is on track for a weekly gain. ING FX strategist Francesco Pesole noted that the recent hawkish comments from Fed speakers have been the main drivers of the dollar’s strength, as they attempt to counter the dovish rate repricing. On Tuesday, several Fed policymakers maintained a balanced tone, considering strong economic data, signs of a slowdown, and the impact of higher long-term bond yields in their assessment of whether further rate hikes are necessary to combat inflation. The focus now shifts to Fed Chair Powell’s remarks later in the day. Matt Simpson, senior market analyst at City Index, warned of the potential for further dollar strength if Powell and other officials continue to emphasize their “higher for longer” narrative. The euro fell 0.3% to $1.0670, weighed down by a deteriorating growth outlook in the eurozone. Retail sales in the bloc declined by 0.3% month-on-month in September, indicating a mixed outlook for consumer and investment spending and raising concerns about a potential recession. Wells Fargo economist Nick Bennenbroek stated that regardless of whether the eurozone enters a recession, there are enough growth headwinds to suggest that the European Central Bank’s monetary tightening is complete. The British pound, which reached a seven-week high above $1.24 earlier in the week, fell 0.3% to $1.2260. The Japanese yen weakened to over 150 per dollar, approaching levels that could trigger currency intervention. Pesole of ING noted that the rate of change in the yen has been significant in recent sessions, and if the dollar-yen exchange rate continues to rise substantially, intervention concerns will escalate. The Australian dollar declined by 0.2% to $0.6425, following a 0.8% drop in the previous session, its largest daily decline in a month. The Reserve Bank of Australia raised interest rates to a 12-year high but tempered its hawkish stance by making it more dependent on incoming data. Westpac’s chief economist Luci Ellis does not expect another rate increase in December, as the RBA’s statement indicated a willingness to raise rates if necessary but expressed a hope to avoid doing so. The statement did not provide enough new information to change the view before the December meeting.