Dollar firm, euro at three-week lows as rate cut bets rise
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By Ankur Banerjee
SINGAPORE (Reuters) - The euro eased to its lowest in over three weeks on Thursday as traders intensified bets that the European Central Bank (ECB) would start cutting rates starting in March 2024, while the dollar was steady ahead of crucial payrolls data this week.
The euro inched 0.07% lower to $1.0757, its lowest point since Nov. 14. The single currency is down 1% this week and is on course for the steepest weekly decline since May.
Traders are betting that there is about an 85% chance that the ECB cuts interest rates at the March meeting, with almost 150 basis points' worth of easing priced by the end of next year.
The question of a rate cut could emerge in 2024, ECB member and Bank of France head Francois Villeroy de Galhau told a French paper in an interview published on Wednesday.
Villeroy said that "disinflation is happening more quickly than we thought".
The ECB will set interest rates on Thursday next week and is all but certain to leave them at the current record high of 4%, although the focus will be on comments from officials about rates outlook.
A slim majority of economists in a Reuters poll expect the ECB to cut rates in the second quarter of next year, earlier than previously thought, with a new tug of war on the exact timing of the first cut emerging.
The dollar has found its footing this month after a 3% drop in November as traders ramp up rate cut bets for other central banks.
The dollar index, which measures the U.S. currency against six rivals, was 0.038% higher at 104.17, just shy of the two-week high of 104.23 it touched on Wednesday. The index is up 0.9% this week, set for its strongest weekly performance since July.
Data on Wednesday showed U.S. private payrolls increased less than expected in November, in yet another sign that the labour market is gradually cooling.
Investor attention will now be on Friday's non-farm payrolls data for a clearer picture of the labour market.
"The various labour market statistics suggest the U.S. labour market is slowly loosening," said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY). "In our view, a sharp weakening of the labour market is needed for financial markets to price in a U.S. recession that we have long expected."
A recent string of softening economic data along with commentary from U.S. Federal Reserve officials have stoked expectations that the central bank is at the end of its rate-increase cycle and will begin to cut rates as soon as March.
Markets are pricing in a 60% chance of a rate cut in March, according to CME FedWatch tool, compared to 50% a week earlier. They are anticipating 125 basis points of cuts from the Fed next year.
Analysts though have cautioned that the markets have been too aggressive.
"The market is too aggressively priced for Fed rate cuts heading into 2024 and so we expect a correction in this pricing to deliver a stronger USD," said David Forrester, currency strategist at Credit Agricole (OTC:CRARY) CIB.
The Canadian dollar eased 0.10% versus its U.S. counterpart to 1.36 per dollar after the Bank of Canada on Wednesday held its key overnight rate at 5% and, in contrast to its peers, left the door open to another hike.
The central bank said it was still concerned about inflation while acknowledging an economic slowdown and a general easing of prices.
The Japanese yen strengthened 0.47% versus the greenback at 146.59 per dollar and was close to the near three-month high of 146.23 it touched at the start of the week.
Expectations that the Bank of Japan will soon end its negative rate policy along with softness in dollar has pulled the yen up from the depths, lifting it away from the near 33-year low of 151.92 per dollar it touched middle of November.
BOJ Governor Kazuo Ueda said on Thursday the central bank has several options on which interest rates to target once it pulls short-term borrowing cost out of negative territory.