Dollar on back foot as jobless claims firm up Fed rate cut views

SINGAPORE – The dollar remained under pressure on Friday as a surge in US jobless claims and a modest tick up in inflation kept investors zeroed in on likely Federal Reserve interest rate cuts next week and beyond.

The dollar index was last trading at 97.585, having snapped a two-day winning streak on Thursday and on track to record its second consecutive weekly decline.

On Thursday, data showed the biggest weekly increase in the number of Americans filing new applications for jobless benefits in four years.

That overshadowed US consumer inflation data for August, which showed prices rising at the fastest pace in seven months but still modest and broadly in line with expectations.

While the mixed data might add some wrinkles to the Fed’s policy deliberations next week, investor focus is mostly centered on rate cut prospects for now.

“We’re quite betwixt and between, and the outlook is quite murky,” said Tim Kelleher, head of institutional FX Sales at Commonwealth Bank in Auckland. “The market is at a crossroads.”

The yield on benchmark 10-year Treasury notes edged up to 4.0282% compared with its US close of 4.011%, after a decline in yields that came close to crossing the 4% mark for the first time since April. Pricing of Fed fund futures indicates that the market believes the Fed is certain to cut its key interest rate by 25 basis points (bps) on September 17 as labor market softness overshadows inflation risks.

However, traders are reining in bets on a jumbo 50 bps rate cut next month, with pricing implying a shallower path of easing before the end of the year than anticipated earlier, according to the CME Group’s FedWatch tool.

Against the yen, the dollar was trading flat at 147.27 yen, little changed after the US and Japanese governments issued a joint statement on Friday, which reaffirmed that exchange rates should be “market determined” and that excess volatility and disorderly moves in exchange rates were undesirable.

The euro stood at USD 1.1727, depreciating 0.1% so far in Asia as traders curbed their bets on another European Central Bank rate cut this cycle, now seeing another move as a coin toss, after the bank sounded sanguine about the economic outlook.

Euro zone rate setters kept their key interest rate on hold at 2% for a second straight meeting, with ECB chief Christine Lagarde saying that the bank remains in a “good place” and said risks to the economy had become more balanced than before.

The Australian dollar was last trading 0.1% firmer at USD 0.6665, holding steady near a 10-month high, while the kiwi slipped 0.1% to USD 0.5971.

Sterling traded at USD 1.3572, slipping 0.1%, while the offshore yuan was last at 7.1135 yuan per dollar, trading flat.

(Reporting by Gregor Stuart Hunter; Editing by Sam Holmes)