Dollar Rises to Highest in a Month as Fed Rate Cut Bets Stall

(Bloomberg) -- A Bloomberg gauge of dollar strength is on track for its longest weekly winning streak since February as the strength of the US economy crushed any remaining hopes of near-term Federal Reserve policy pivot. 

The benchmark rose nearly 0.8%, to the highest level in more than a month, after an advance in nonfarm payrolls Friday. Odds of a Fed rate cut were pushed out after the report with the swaps market now pricing in the first full 25 basis point rate-cut from the Federal Reserve no earlier than December.

“July is absolutely out of the picture,” Jayati Bharadwaj, foreign-exchange strategist at TD Securities, said of the Fed’s first rate cut. The dollar gauge will continue rising if “the September cut looks less and less likely with incoming data,” she added.

US job growth jumped in May and wage growth accelerated. 

With the labor market still going strong, the Fed is widely expected to keep its benchmark rate unchanged at its policy meeting next week, that’s left the dollar on course for its third consecutive weekly gain. 

Economists at Citigroup Inc. and JPMorgan Chase & Co., some of the last holdouts still predicting a Fed cut in July, threw in the towel Friday and pushed back their expectations. Citi now sees the first rate cut to take place in September while JPMorgan expects the reduction to happen in November, after US election.

Weakness outside the US has led a few major central banks to start lowering their borrowing costs ahead of the Fed. The European Central Bank and the Bank of Canada both delivered their first cuts this week. 

The Canadian dollar underperformed currency peers this week after Governor Tiff Macklem said it’s “reasonable to expect further cuts.” Canada also reported on labor market Friday. The unemployment rate rose, keeping more rate cuts on the table this year. 

The greenback’s climb is likely to fuel renewed buying, after investors trimmed their bullish wagers on the greenback last month, according to Commodity Futures Trading Commission data.

The latest report for the week ended Tuesday, May 28, showed that speculators cut their long dollar bets for a fifth straight week. They now hold roughly $14.6 billion in wagers betting that the dollar will rise, the lowest tally since the end of March.

“With a broad-based strength in the US payrolls data, the market was effectively forced to buy the US dollar back,” Yusuke Miyairi, a currency strategist at Nomura International Plc. said. “With a cut discussion likely to be carried over to the September FOMC, it seems the resilience in the US dollar is likely to still continue.”

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