Dollar Continues to Strengthen

The dollar index traded above 97 on Tuesday, holding gains from the previous session as investors looked ahead to key US economic data this week that could shape expectations for Federal Reserve policy. Market attention is focused on the minutes from the Fed’s last meeting, advance GDP data, and the core PCE price index, which is the central bank’s preferred inflation measure. Last week, the dollar came under pressure after benign US inflation data reinforced expectations that the Fed will cut interest rates later this year. However, earlier data showed US payrolls rose by the most in more than a year and the unemployment rate unexpectedly fell, signaling a stabilizing labor market. Markets currently price in a June rate cut, with roughly 62 basis points of total easing expected this year, implying two quarter-point cuts and about a 50% probability of a third.

The dollar index held just below 97 on Monday, moving sideways in holiday-thinned trading as US markets were closed for the Presidents’ Day holiday. Last week, the dollar came under pressure after benign US inflation data reinforced expectations that the Federal Reserve will cut interest rates later this year. The annual headline inflation rate slowed to 2.4% last month, down from 2.6% in each of the previous two months and below forecasts of 2.5%. On a monthly basis, inflation eased to 0.2%, compared with expectations that it would remain steady at 0.3%. Meanwhile, earlier data showed US payrolls rose by the most in more than a year and the unemployment rate unexpectedly fell, signaling a stabilizing labor market. Markets are currently pricing in a Fed rate cut in July, with a strong probability of a move in June as well. Investors now turn to the latest Fed minutes, Q4 GDP data, and the Fed-preferred core PCE price index report for further guidance on the monetary outlook.

The dollar index held steady around 97 on Friday, moving sideways for a fourth straight session after softer inflation data reinforced expectations for Federal Reserve rate cuts this year. The annual headline inflation rate slowed to 2.4% last month, down from 2.6% in each of the previous two months and below forecasts of 2.5%. On a monthly basis, inflation eased to 0.2%, compared with expectations that it would remain steady at 0.3%. Markets are pricing the Federal Reserve to hold rates in March before delivering two 25-basis-point cuts later this year. Recent data showed US payrolls rose by the most in more than a year and the unemployment rate unexpectedly fell, signaling a stabilising labor market. Over the week, the dollar is set to decline more than 2% against the yen, following Prime Minister Sanae Takaichi’s decisive election win and fresh verbal interventions from Tokyo. The Australian dollar also posted strong gains amid hawkish signals from the Reserve Bank of Australia.