Dollar Pauses Amid U.S. Data, Focus Shifts to French and British Economies

• The U.S. dollar halted after a steady climb, driven by signs of labor market weakness.

• The dollar index stands at 102.8, down 0.1%, after reaching its highest level since mid-August.

• Traders reduced bets on further aggressive Federal Reserve rate cuts this year.

• British economic growth provided temporary relief, while French politics weigh on the euro.

• Markets await key data from China, along with India's rupee hitting a new low.

The U.S. dollar paused its ascent on Friday, October 11, 2024, after hitting a two-month high against a basket of major peers. While inflation data and weekly jobless claims provided conflicting signals, the labor market's apparent weakness has fueled expectations for more aggressive Federal Reserve rate cuts by the end of the year.

The dollar index, which tracks the greenback against six major currencies, rested at 102.8, just below the 103 mark hit on Thursday. The U.S. core consumer inflation for September came in slightly above expectations at 0.3%, signaling persistent inflation pressures. However, high weekly jobless claims, affected by Hurricane Helene, have kept hopes alive for a 25-basis-point rate cut in November.

Source: Investing.com

Lee Hardman, a senior currency analyst at MUFG, noted that the latest U.S. data may have slowed the dollar's momentum. “The data yesterday from the U.S. has taken some of the upward momentum out of the dollar,” Hardman said. He added, however, that the overall impact on Federal Reserve policy decisions may remain limited due to various data anomalies caused by hurricanes and other short-term disruptions.

In the U.K., the economy grew in August after two consecutive months of stagnation, giving some breathing room to newly appointed finance minister Rachel Reeves ahead of the Labour government's first budget. Despite the positive GDP figures, the pound remained largely unchanged, hovering near $1.3076, still not far from its one-month low.

The pound's movement against the euro was similarly stable, with traders more focused on upcoming inflation and labor market data due next week. The data could provide clearer signals on whether the Bank of England will shift its stance on interest rates in response to domestic economic conditions.

In France, the political situation has drawn attention as Prime Minister Michel Barnier's government struggles to pass the 2025 budget. The budget includes plans for 60 billion euros in spending cuts and tax hikes, which could trigger backlash from opposition lawmakers. The euro remained slightly up at $1.10947 but could face near-term volatility depending on political developments.

A potential ratings downgrade by Fitch on France’s debt could add further pressure on the euro. Hardman commented that while a downgrade may lead to a short-term reaction, a sustained lack of confidence would likely require a more significant sell-off in French bonds.

Anticipation is also building around an upcoming news conference by China’s finance ministry on fiscal policy, which is expected to influence China-exposed currencies like the Australian and New Zealand dollars. The Australian dollar traded flat at $0.6739, while the New Zealand dollar stood at $0.6096, with both currencies set for weekly losses. The Reserve Bank of New Zealand’s recent rate cut and hints of further easing weighed heavily on the kiwi.

In emerging markets, India’s rupee weakened past the 84 mark against the dollar for the first time. Traders speculated that the Indian central bank intervened by selling dollars to prevent further depreciation of the currency. As the Indian economy contends with inflationary pressures, the rupee’s decline has raised concerns about broader economic stability in the region.

As the U.S. dollar takes a pause from its recent rally, traders are assessing a mix of U.S. inflation data, European political developments, and the ongoing Middle Eastern conflict. The upcoming economic data from China and Europe will provide more insights into the global economic outlook and currency market movements. With key decisions from central banks still pending, market participants are gearing up for more volatility in the coming weeks.