The US dollar has continued to trade at weaker levels overnight with the dollar index on course to record its second consecutive weekly decline. It follows the failed attempt earlier this month to break out above the 96.000 to 100.00 trading range that has been in place since April/May. US dollar weakness yesterday coincided with a renewed sell-off for US AI/tech stocks. The Nasdaq composite equity index declined sharply by -2.3% giving back all of its gains over the past week, and has fallen by almost 5% from the high recorded at the end of last month. The broad-based US dollar sell-off and more risk-averse trading conditions have helped to prevent USD/JPY from breaking above the 155.00-level. At the same time, Japanese Finance Minister Katayama continued to intervene verbally in an attempt to at least slow the pace of yen weakness. She voiced concern recent moves have been “on-sided” and “rapid”, and emphasized that she’s examining excessive or disorderly FX moves with a high sense of urgency. The pair is getting loser to levels at which Japan last intervened directly to support the yen back in July 2024 when USD/JPY was trading between 157.00 and 162.00. It is likely to trigger more speculation over Japan stepping back into the market which will act as a deterrent for further speculative selling. In contrast to the yen, the other low yielding, safe haven currency of the Swiss franc has been the best performing G10 currency this week. It has been boosted by reports that Switzerland is moving closer to reaching a trade deal with the US with lower the tariff on imports from 39% to 15% which would move it into line with the tariff applied to the goods from the EU. If confirmed it would help to ease downside risks for Switzerland’s economy and reduce pressure on the SNB to lower rates into negative territory. EUR/CHF has dropped sharply this week and is set to retest recent lows at just above the 0.9200-level.
The US dollar has weakened this week even as the US rate market has moved to scale back expectations for Fed rate cuts. The US rate market is currently pricing in around 13bps of cuts by the December FOMC meeting down from around 17bps a week ago. It highlights that the December FOMC decision is now judged as more of a toss up over whether the Fed decides to lower rates for the third consecutive meeting. Comments from Fed officials over the past week have highlighted opposition to another rate cut as soon as next month. Boston Fed President Susan Collins, who votes on the FOMC this year, stated this week that “it will likely be appropriate to keep the policy rates at the current level for some time to balance the inflation and employment risks in this highly uncertain environment”. After Kansas City Fed President Schmid dissented last month to keep rates on hold, it appears likely there will be more hawkish dissents in December if rates are cut again. Our forecast for another cut in December is built on the assumption that the Fed will continue to prioritize weakness in the labour market when setting policy. We expect the delayed releases of NFP reports for September and October to tip the balance in favour of another cut. National Economic Council Director Kevin Hassett stated yesterday that the October NFP report will be released but without the household survey which includes the unemployment rate. He also added it was possible the September NFP report will be released next week although an exact date has not yet been confirmed.
USD IS CORRECTING LOWER AFTER RUNNING INTO RESISTANCE
Source: Bloomberg, Macrobond & MUFG GMR
