SINGAPORE, Sept 13 (Askume) – The dollar weakened and the euro and yen rose on Friday, as investors remained nervous ahead of a major central bank report next week that will focus on the Federal Reserve and its expected interest rate cut.
Although the Federal Reserve is almost certain to cut interest rates next week, there is still uncertainty over whether the rate cut will be 25 basis points or 50 basis points, leaving investors confused and putting pressure on the dollar.
Citing media reports in the Financial Times and the Wall Street Journal, analysts said the Fed’s decision will be crucial, which is why traders expect a sharp rate cut next week.
Christopher Wong, currency strategist at Oversea-Chinese Banking Corporation (OCBC), said Thursday’s rise in US jobless claims data and a Wall Street Journal article on the Fed’s interest rate cut dilemma have revived concerns that a sharp interest rate cut is likely at the September meeting.
The CME FedWatch tool showed traders were considering a 43% chance of a 50 basis point rate cut, up from 27% a day earlier, while a 57% chance of a 25 basis point rate cut was considered. The market expects a 113 basis point weakening over the remaining three sessions of the year.
The European Central Bank cut interest rates on Thursday but President Christine Lagarde played down expectations for another rate cut next month, boosting the euro, which extended gains in early trade on Friday and maintained it.
In addition to the Federal Reserve, the Bank of England and the Bank of Japan will also hold policy meetings next week.
The euro rose to $1.1083 after gaining 0.57% on Thursday, pushing the U.S. dollar index, which measures the greenback against a basket of six currencies including the euro, to 101.11.
US economic reports were mixed this week, leading to lower interest rate expectations, with Thursday’s report showing layoffs remained low despite a slowdown in the labor market and other data showing producer prices rose slightly more than expected in August.
Ryan Brandham, head of global capital markets for North America at Validus Risk Management, said the data may not force the Fed to delay a rate cut, “but it will give the Fed a better sense of the balance between the two sides of its policy.”
“The risk remains that inflation will not return to target as easily as everyone, including the Fed, expects.”
The yen rose 0.3% to 141.38 per dollar in early trade, close to an 8-1/2-month high of 140.71 hit ahead of Wednesday’s Bank of Japan meeting.
Bank of Japan board member Naoki Tamura said on Thursday that the central bank should raise interest rates by at least 1% in the second half of the next fiscal year , but he also said the central bank could gradually raise interest rates in stages.
Sterling rose 0.1% to $1.31415 ahead of next week’s Bank of England meeting, with futures markets estimating a roughly 80% chance of keeping interest rates unchanged after a 25 basis point cut in August.
