Dollar Strengthens as Market Reassesses Fed Rate Cut Expectations

The dollar saw an upward trend on Thursday as investors reevaluated their predictions regarding the extent of rate cuts by the Federal Reserve for the current year. Market caution prevailed after an impressive risk rally in the previous month, as per a report by Reuters.

During the Asian trading session, the greenback reached a peak of 143.90 against the yen, marking a period of over two weeks. With Japan returning from an extended New Year break, the dollar was last traded at 143.75, showcasing a gain of over 0.9% against the Japanese currency in the preceding session – its most significant surge since October.

The Australian dollar, commonly considered a gauge of risk appetite, struggled to recover from Wednesday's low of $0.6703, settling at $0.6744. Similarly, the New Zealand dollar, sensitive to risk, was at $0.6266, having touched a two-week low of $0.6221 in the previous session.

Minutes from the Fed's December policy meeting, released on Wednesday, indicated officials' confidence in controlling inflation. They expressed concerns about the risks associated with the central bank's "overly restrictive" monetary policy on the economy. However, there were no definitive indications of when the Fed might initiate rate cuts, with policymakers recognizing the need for rates to remain restrictive for some time.

Factors such as global growth concerns, risk-off sentiment in U.S. equities, and a partial unwinding of aggressive bets on Fed cuts contribute to the ongoing rebound of the U.S. dollar.

Against a basket of currencies, the greenback experienced a 0.03% rise to 102.43, nearing a three-week peak of 102.73 from the previous session.

While the euro faced losses and rose 0.09% to $1.0931, sterling remained close to its recent three-week low at $1.2667.

Recent data indicated a further contraction in U.S. manufacturing in December, albeit at a slower pace, and a third consecutive monthly decline in U.S. job openings in November, suggesting easing labor market conditions.

Despite signs of a cooling U.S. economy, opinions on the pace and scale of Fed rate cuts vary among traders. Current market pricing shows approximately a 72% chance of the Fed beginning rate cuts in March, compared to an 87% chance a week earlier, according to the CME FedWatch tool.

The eagerly awaited U.S. nonfarm payrolls report, scheduled for Friday, is expected to provide additional clarity on the extent to which the Fed can lower rates.

In geopolitics, both Hezbollah in Lebanon and the Israeli army released statements indicating a shared interest in preventing the escalation of conflict beyond the Gaza Strip. This followed a drone strike in Beirut that resulted in the death of a Palestinian Hamas deputy leader.