Title: U.S. Dollar Slips as Treasury Yields Decline Amid Growing Fed Rate Cut Speculation
Original reporting by Karen Brettell, Reuters
The U.S. dollar experienced a notable decline following a broader slump in U.S. Treasury yields, driven by increasing market expectations that the Federal Reserve could soon pivot from its high-interest rate stance. This change in sentiment comes after recent economic data signaled signs of slowing inflation and softened labor market conditions, causing investors to recalibrate their bets on the trajectory of monetary policy heading into 2024.
A weak U.S. Treasury auction intensified pressure on bond yields, which in turn reduced demand for the dollar across global currency markets. As traders anticipate a potential trend reversal in U.S. monetary policy, the greenback’s rally, which has been gaining momentum for most of the year, has started losing steam.
Key developments influencing the foreign exchange market and expectations of Federal Reserve rate cuts are discussed in detail below.
Market Drivers Behind the Dollar’s Decline
Several interrelated factors have contributed to the weakening of the U.S. dollar. Chief among them is the recent decline in U.S. Treasury yields, which are closely tied to expectations for future interest rate moves.
– Treasury yields dropped across the board, with the benchmark 10-year yield falling to its lowest level in nearly six weeks.
– The yield decline was brought on by softer-than-expected economic data and underwhelming results from the Treasury Department’s series of bond auctions.
– Lower yields reduce the attractiveness of U.S. debt investments compared to international alternatives, directly impacting the demand for the dollar.
Karen Brettell of Reuters notes that the sharp drop in U.S. Treasury yields came after the Treasury sold $48 billion in three-year notes at a high yield of 4.701 percent, a result that was weaker than anticipated. This auction marked the beginning of a $112 billion issuance plan for the week and signaled that investors may be demanding higher returns due to increased supply and growing concerns over future rate cuts.
Federal Reserve Rate Outlook
The Fed has held rates steady at a targeted range of 5.25 percent to 5.50 percent, following a string of rate hikes that began in March 2022 to tame persistent inflation. Now, however, signs are mounting that the central bank could be nearing the end of its tightening cycle.
– Fed fund futures markets now price in a stronger chance of rate cuts starting as early as March 2024.
– Futures contracts indicate a nearly 91 percent probability of at least one 25-basis-point cut by May 2024.
– In total, markets are anticipating more than 90 basis points of easing by the end of 2024.
These updated expectations reflect shifting views among investors, analysts, and policymaking officials, many of whom believe the Federal Reserve is balancing a slower economy and disinflationary forces.
Softening Economic Indicators
Recent macroeconomic reports have added weight to the narrative of a slowing U.S. economy. These indicators suggest that the aggressive rate hikes since 2022 may have had the desired effect of cooling demand and controlling inflation.
Key figures shaping sentiment:
– U.S. payrolls data released the prior week showed a drop in job openings and a declining quits rate, signaling a softening labor market.
– The unemployment rate rose slightly to 3.9 percent, though it remains historically low.
– Inflation, as measured by the Fed’s preferred gauge—the core Personal Consumption Expenditures (PCE) index—rose 3.7 percent year over year in September, down from 3.8 percent in August.
These numbers indicate that inflation, while still above the central bank’s 2 percent target, is moving in the right direction. The improving inflation backdrop gives the Fed more flexibility to pause or eventually reverse course without risking further economic overheating.
Currency Market Implications
The dip in U.S. bond yields and growing expectations of rate cuts have weakened the dollar against most major
Read more on EUR/USD trading.