MARKET UPDATE
Dollar slips as traders bet Fed done with rate hikes.
The dollar eased on Friday and was on course for a weekly decline against a basket of currencies as traders wagered that the U.S. Federal Reserve was most likely done with rate increases, lifting risk sentiment.
The dollar index, which measures the U.S. currency against six rivals, was down 0.122% at 106.07, not far from the one-week low of 105.80 it hit on Thursday.
The index is on course to drop 0.4% for the week, just its third week of losses in the last 16 weeks.
Markets are now pricing in less than a 20% chance of a rate increase in December compared with 39% earlier, CME FedWatch tool showed, in the wake of the U.S. central bank’s holding interest rates steady on Wednesday. The Fed, however, left the door open to a further increase in borrowing costs in a nod to the economy’s resilience.
“Fed is now walking a tightrope between financial conditions and rate hikes,” said Moh Siong Sim, currency strategist at Bank of Singapore, noting that the Fed said rising bond yields are doing some work for it and it can afford to wait and see.
Asia FX firms as dollar extends losses.
Most Asian currencies advanced on Friday, while the dollar eased further as traders bet that the Federal Reserve was done with its interest rate hikes, although anticipation of key nonfarm payrolls data kept gains in check.
Regional trading volumes were also somewhat muted on account of a Japanese market holiday.
Rate-sensitive, risk-heavy units such as the South Korean won, Philippine peso and the Indonesian rupiah were the best performers for the day, rallying between 0.5% and 1%.
The Japanese yen rose 0.1% in holiday-thinned trade, but still remained close to its weakest level in one year, at above 150 against the dollar. This kept traders wary of any intervention by the Japanese government in currency markets, after the Bank of Japan struck a less hawkish tone earlier this week.
The Chinese yuan was flat, hovering around a one-year low following a string of weak economic readings this week. A private survey showed on Friday that Chinese service sector activity grew less than expected in October, although it did accelerate slightly from the prior month.
Gold prices steady before nonfarm payrolls.
Gold prices steadied on Friday as traders hunkered down before key nonfarm payrolls data, with the yellow metal headed for a weekly loss as risk appetite improved in the wake of dovish signals from the Federal Reserve.
While gold saw some relief from a drop in the dollar and Treasury yields, this was largely offset by traders dumping the yellow metal in favor of more risk-driven assets, particularly stocks and currencies.
Gold was also hit with some profit taking this week, after increased safe haven demand, following the onset of the Israel-Hamas war, saw bullion prices jump over 10% in October.
But traders were now pricing in a lower risk premium for gold, amid easing concerns that the conflict will spill over into the broader Middle East region. International attempts to broker a ceasefire furthered this notion.
Spot gold steadied around $1,986.34 an ounce, while gold futures expiring in December were flat at $1,993.70 an ounce by 00:49 ET (04:49 GMT). Both instruments were down about 1% this week.
Nonfarm payrolls in focus after Fed strikes dovish chord
Markets were now awaiting key nonfarm payrolls data for October, due later on Friday. The reading comes just a few days after the Fed held interest rates steady and offered middling signals on its plans for more rate hikes. This spurred a rush into risk-driven assets, as markets bet that the Fed was done with its rate hike cycle, and will begin trimming rates by mid-2024.
But the payrolls data will be closely watched, given that the Fed still left the door open for one more rate hike this year- although the move will largely depend on the trajectory of inflation and the labor market.
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