The U.S. dollar has recently stabilized near a four-month high in European trade, largely driven by strong economic data that has exceeded expectations of early rate cuts by the Federal Reserve. The Dollar Index, which tracks the greenback against a basket of six other currencies, traded largely unchanged at 104.755, just below the previous session’s peak of 105.07. This marks the highest level since the middle of November last year. The boost in the greenback came after data showed the first expansion in U.S. manufacturing since September 2022, reflecting a positive outlook on the economy.
The signs of strength in the U.S. economy have caused traders to adjust their expectations regarding early interest rate cuts by the Federal Reserve, resulting in support for the dollar. The CME’s FedWatch tool now indicates a 61.3% probability of a Fed rate cut in June, down from about 70.1% a week ago. The upcoming economic data, including job openings and durable orders for February, will continue to shape market expectations, leading up to the highly anticipated payrolls report for March on Friday.
Analysts at ING point out that given the recent positive U.S. data, it is unlikely for the Federal Reserve to adopt a dovish stance in the near future. Market watchers are closely monitoring the various Fed speakers scheduled for the week to gain insights into the central bank’s monetary policy direction. The job openings data is seen as a potential market mover that could impact the recent gains in the dollar. In Europe, the euro fell against the dollar after eurozone manufacturing activity deteriorated further in March, indicating a contraction in activity for the 21st consecutive month.
Impacts on Currency Pairs
The EUR/USD pair saw a decline, with two-year swap rate differentials favoring the dollar, resulting in a more supportive rate condition for the greenback. This has pushed the euro below the 1.0800 level, with analysts targeting the 1.0695/1.0700 lows observed in mid-February. Meanwhile, GBP/USD rose after British manufacturers reported growth in activity for the first time in 20 months in March, suggesting an end to the shallow recession. The USD/JPY pair traded higher, nearing its weakest level since reaching a 34-year trough, as Japanese authorities intervened in currency markets to address disorderly moves.
The U.S. dollar has stabilized near its recent four-month high, driven by positive economic data and changing expectations of rate cuts by the Federal Reserve. Market dynamics, including upcoming economic reports and central bank speeches, will continue to influence the dollar’s performance against other major currencies. Traders should remain vigilant and adapt to the evolving market conditions to make informed decisions in the currency markets.