Dollar faces crunch week for US rates, yen holds gains

SYDNEY – The dollar started in a cautious mood on Monday in what is shaping up to be a critical week for the prospect of US rate cuts, while the yen’s recent rebound was underpinned by wagers on rising rates at home.

Over the weekend, Bank of Japan Governor Kazuo Ueda said the next interest rate hikes are “nearing in the sense that economic data are on track,” following figures showing Tokyo inflation picked up in October.

Markets now imply a 56% chance the BOJ will hike by a quarter point to 0.5% at its policy meeting on Dec. 18-19.

Barclays economist Christian Keller said data on labor earnings this week should show a further pickup and all the signs were pointing to another strong “shunto” wage round in February.

“The wage and inflation picture continues to support further rate hikes, though whether the BOJ moves in December or January remains a close call,” he added.

The risk of an early hike was enough to keep the dollar pinned at 149.60 yen JPY=EBS, having shed 3.3% last week in its worst run since July. Support lies around 149.40/47 and 147.35.

The euro held at USD 1.0555, after bouncing 1.5% last week and away from a one-year trough of USD 1.0425. That left the dollar index flat at 105.790 =USD, having closed out November with a gain of 1.8% even after last week’s setback.

“Given the continued resilience of the US economy and a worsening outlook elsewhere, we don’t think this is the start of a deeper setback for the dollar,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.

“But the bar for a further shift in expected interest rates in favor of the US in the near term is quite high,” he added. “A period of consolidation into year-end looks to us like the most likely scenario, although the risks remain skewed in favor of the dollar over the course of 2025.”

Key to the outlook for rates will be the November payrolls report due Friday where median forecasts favor a rise of 195,000 following October’s weather and strike-hit report, which could also be revised given a low response rate for that survey.

The jobless rate is seen edging up to 4.2%, from 4.1%, which should keep the Federal Reserve on course to cut by 25 basis points on Dec. 18.

Markets imply a 65% chance of such an easing, though they also only have two more cuts priced in for all of 2025.

A host of Fed officials are due to speak this week, including Fed Chair Jerome Powell on Wednesday, while other data include surveys of manufacturing and services.

The European Central Bank is also seen cutting rates this month, with markets implying a 27% chance it might even ease by 50 basis points on Dec. 12.

Political uncertainty is another drag for the single currency as investors wait to see if France’s government can survive the week intact.

France’s far-right National Rally leaders said on Sunday that the government had rebuffed its calls for more budget concessions, raising the chances of a no-confidence vote in the coming days that could topple Prime Minister Michel Barnier.

The threat of an ever-wider budget deficit saw French yields match those in Greece while the spread over German yields reached the highest since 2012.

(Reporting by Wayne Cole; Editing by Sam Holmes)