TOKYO, Oct 11 (Askume) – The U.S. dollar fell from its highest in more than two months against major currencies as signs of weakness in the labor market raised the prospect of a rate cut by the Federal Reserve.
Still, the dollar was set for a second straight weekly gain on Friday as traders left open the possibility of a half percentage point rate cut at the Federal Reserve’s next policy meeting, thanks to last week’s unexpectedly strong monthly payrolls data.
Market interpretation of Thursday’s rise in initial jobless claims was complicated by a rise in the Consumer Price Index (CPI) that day , a reminder that restrictive monetary policy may be needed to control inflation.
According to the CME Group’s FedWatch tool, the probability that the Federal Reserve will cut interest rates by 25 basis points on November 7 rose to 83.3% from 80.3% the previous day, while the probability of a policy stance remaining unchanged. A week ago, the probability of a half percentage point reduction was 32.1%, and the probability of a quarter percentage point reduction was 67.9%.
The two-year U.S. Treasury yield, which typically moves in line with interest rate expectations, fell to 3.9531% on Friday morning, weighing on the dollar.
The US dollar index, which measures the greenback against its six peers, was steady at 102.84 by 0111 GMT, but down 0.3% from Thursday’s 103.17, its highest since Aug. 15. This week, the index is expected to rise 0.39%, building on last week’s 2.06% gain.
Although the Fed has said its focus is on full employment rather than price stability, investors are still closely monitoring consumer price index data for confirmation that inflation is under control.
“Overall, there has been some volatility in global markets, but there has been little change in yields overall,” said Tapas Strickland, head of market economics at National Australia Bank.
“Overall, (the CPI results) do not change the story of controlling inflation, and the Fed should continue its efforts to keep policy in a more neutral position regardless of the situation.”
Comments from Fed officials on Thursday showed the division of opinion, with Chicago Fed President Austin Goolsbee saying the “majority” of Fed policymakers believe rates will “gradually come down, well below where they are today,” while Atlanta Fed Reserve Bank President Raphael Bostic said.
USD/JPY rose 0.06% to 148.68 yen, close to Thursday’s high of 149.58 yen, the highest since Aug. 2.
The euro rebounded from a two-month low of $1.090025 overnight to end the day at $1.093650.
The Australian dollar was steady at $0.67395 against the US dollar on Thursday, having risen from $0.6702 to its lowest since Sept. 16.
Australia’s currency has been hit this week by fluctuations in expectations of stimulus from China, the country’s biggest trading partner. China’s Finance Ministry is scheduled to hold a press conference on fiscal policy on Saturday.
