The US dollar is poised to register its strongest weekly performance in over a month as investors increasingly doubt the Federal Reserve will implement interest rate cuts in December. The shifting sentiment comes amid confusing signals from economic data and ongoing uncertainty in global currency markets.
Mixed Signals from US Jobs Data
The delayed release of September's nonfarm payrolls report on Thursday presented a contradictory picture of America's labor market. While employment growth showed acceleration during the month, the unemployment rate climbed to 4.4%, marking the highest level in four years. This conflicting data has left market participants uncertain about the Federal Reserve's next move.
Economists at Wells Fargo noted that the shutdown-delayed jobs report failed to provide clarity about the Federal Open Market Committee's potential actions at its December meeting. "We remain of the view that what the Fed should do is cut the federal funds rate by 25 bps... That said, what the Fed will do is a separate debate entirely," the economists stated, adding that their call for rate reduction in December was "close" and that maintaining current rates "would not surprise us at this point."
Market pricing currently reflects just a 27% probability of the Fed easing rates next month, significantly lower than previous expectations.
Global Currency Movements
The dollar index, which measures the greenback against a basket of major currencies, hovered near a 5.5-month peak at 100.20. The index is set to record a weekly gain of 0.9%, representing its best performance in over a month.
Among other major currencies, the euro remained pinned near a two-week low, trading at $1.1528 and heading for a weekly decline of 0.8%. Sterling showed modest gains of 0.11% to $1.3084 but was still set to lose 0.7% for the week. Investors are closely watching Britain's upcoming budget announcement, which represents a crucial test for the nation's currency and bond markets.
The Australian dollar edged up 0.09% to $0.6446 after sliding 0.6% overnight amid broad risk-off sentiment in global markets. Similarly, the New Zealand dollar rose 0.11% to $0.5588 following a 0.4% decline on Thursday.
Yen Intervention Threats Intensify
Much of the currency market's attention this week has focused on the struggling Japanese yen, which has plunged to fresh lows as investors express concern about the nation's worsening fiscal position. The deterioration stems from Prime Minister Sanae Takaichi's substantial stimulus package, which the cabinet plans to approve later on Friday. The package is set to be worth approximately 21.3 trillion yen.
James Athey, a fixed income portfolio manager at Marlborough in London, commented on the underlying issue: "At the very heart the problem is politicians making promises to electorates which defy economic reality," referring to this week's steep selloff in Japanese bonds and the currency.
The yen languished near a 10-month low at 157.33 per dollar, having bottomed at 157.90 in the previous session. The currency is set to lose nearly 2% for the week, marking its worst performance in over a month.
Japanese Finance Minister Satsuki Katayama escalated intervention rhetoric on Friday, stating that authorities would consider stepping in to deal with "excessively volatile and speculative moves." This warning caused the yen to briefly spike higher during trading.
Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho, highlighted the growing concern: "The elephant in the room now is mounting intervention risks. Interventions are likely to be opportunistic and short-lived. Essentially, speed bumps, not barricades."
Tokyo last intervened in the foreign exchange market in July 2024, spending 5.53 trillion yen (approximately $37 billion) to pull the yen away from 38-year lows.
Separate data released on Friday showed Japan's core consumer prices rose 3.0% in October compared to a year earlier, remaining above the central bank's 2% target and sustaining expectations of a near-term interest rate hike.
