Herbert Lash and Joyce Alves
NEW YORK/LONDON (Reuters) – The dollar extended its decline on Wednesday as it consolidated a rebound in recent days on unexpectedly strong U.S. economic data and Federal Reserve officials reacting to market expectations that interest rates could be cut soon.
The dollar fell from a nearly three-month high against the euro on Tuesday, even as market bets on a Fed rate cut in March rose four percentage points over the past two days.
Treasury yields, often a factor in the dollar’s strength when they attract foreign investment, also rose.
“The dollar rally is somewhat exaggerated, which is consistent with how I view U.S. bond yields,” said Brad Bechtel, global head of FX at Jefferies in New York.
“We’ve come pretty far, pretty quickly, and we’re kind of breaking through some levels of resistance.”
An index of the U.S. currency against six major peers, including the euro, rose above its 100-day moving average on Monday and Tuesday for the first time since late November.
The euro rose 0.18% to $1.0775 to the dollar after falling Tuesday to $1.0722, its lowest level since Nov. 14.
The dollar index fell 0.11% to 104.01, just below its 100-day moving average of 104.20.
“It’s really the data that will determine the next step. In the meantime, we’ll probably consolidate a little bit, pull back a little bit in the dollar, maybe move up a little bit in the euro and sterling,” Bechtel said.
The next major data release scheduled will be the January Consumer Price Index, due on February 13th.
Analysts pointed to technical factors contributing to the dollar’s pullback after two days of 1.4% gains against the euro. Unexpectedly strong US employment data, as well as more aggressive rhetoric from Federal Reserve Chairman Jerome Powell, undermined bets on a rate cut as early as March.
U.S. Treasury yields gained some respite on Wednesday after falling from this week’s highs as robust demand for new three-year note sales removed some support from the dollar.
“Despite the decision to abandon hopes of a March rate cut, the market still shows some reluctance to go all-in on long US dollar trades, given the high belief in a rate cut later this year,” said Jane Foley, head of foreign exchange strategy in the company. Rabobank.
Traders now rate the likelihood of a rate cut in March at 18.5%, up from 14.5% on Monday, CME’s (NASDAQ:) FedWatch Tool shows. At the beginning of the year, the probability of betting was 68.1%.
A sharper-than-expected fall in industrial output in the eurozone’s largest economy had no impact on the euro as “the German industrial crisis is now a common story,” said Chris Turner, global head of markets at ING.
The dollar rose 0.13% against the yen to 148.125, after falling 0.49% on Tuesday. The currency pair tends to be extremely sensitive to changes in Treasury yields.
“Financial markets are in the process of reassessing their expectations regarding Federal Reserve policy,” said James Knightton, senior corporate FX dealer at Convera.
“If positive economic data continues in the US, especially on inflation, the situation could turn towards earlier rate cuts, which could potentially weaken the dollar further.”
Sterling rose 0.24% against the dollar to $1.2629 after higher UK house prices supported bets the Bank of England is unlikely to cut rates any time soon.