(Bloomberg) — The dollar slid to start September as mixed signals on the Federal Reserve’s next move kept traders on edge ahead of a pivotal inflation report, while a surging yen reverberated across global currency markets.
The Bloomberg Dollar Spot Index closed the week 0.7% lower even after paring the loss on Friday on a stronger-than-expected jobs report that revived bets on a Fed rate hike later this month.
Traders priced in about a 60% chance of a quarter-point rate hike, up from around even odds before the report. That puts greater weight on next week’s reading on consumer prices, said Noah Buffam, strategist at CIBC Capital Markets.
“The next trend move in the dollar likely depends on inflation next week and its read through to the September Fed,” he said.
Earlier in the week, the greenback touched its weakest level since May after Fed Governor Christopher Waller pointed to progress on inflation, damping expectations for an imminent increase in borrowing costs.
Waller’s speech “was a little more dovish than most were expecting,” said ING Groep NV’s head of global markets Chris Turner.
Adding to the dollar’s weekly decline was a sharp rally in the yen. The Japanese currency posted its best week since July, gaining about 2.4% against the dollar, fueled by expectations that the Bank of Japan may raise its benchmark rate by a quarter point this month while leaving the door open to faster hikes thereafter.
Friday’s data showed job growth surged in August, while the unemployment rate held steady at 4.1%. A pivotal consumer-price report due next week has the potential to solidify expectations for the Fed’s next move and, in turn, the path of the dollar.
Buffam said there’s a risk that the data remains “too hot,” which could give the dollar room to rally in the near term.
An in-line inflation print, meanwhile, “would likely help the Fed avoid a September hike, keeping the broader backdrop biased against the dollar,” said Jayati Bharadwaj, head of FX strategy at TD Securities.
Options show investors are on balance becoming more pessimistic about the greenback’s prospects. One-month risk reversals, a closely watched gauge of market positioning, turned bearish on the trade-weighted dollar again this week.
Wall Street strategists are also positioning for more weakness. Bank of America recommends selling the dollar against the yen, forecasting the Japanese currency will strengthen to 149 per dollar by year-end. TD Securities, meanwhile, maintains a “moderately bearish dollar view” for the rest of the year.
More stories like this are available on bloomberg.com
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