By Wayne Cole
SYDNEY (Reuters) – The dollar started on Monday in a cautious mood in what looks to be a crucial week for the prospect of U.S. interest rate cuts, while the yen’s recent recovery was underpinned by bets on rising interest rates at home.
Over the weekend, Bank of Japan Governor Kazuo Ueda said the next rate hikes are “close in the sense that economic data are on track,” following figures showing inflation in Tokyo increased in October.
Markets now imply a 56% chance that the BOJ will rise a quarter of a percentage point to 0.5% at its December 18-19 policy meeting.
Barclays economist Christian Keller said labor earnings data should show a further rise this week and all signs pointed to another strong round of ‘shunto’ wages in February.
“The wage and inflation picture continues to support further rate hikes, although it remains exciting whether the BOJ will make a move in December or January,” he added.
The risk of an early rate hike was enough to keep the dollar stuck at 149.60 yen, after losing 3.3% last week in its worst period since July. The support is around 149.40/47 and 147.35.
The euro remained at $1.0555 after rising 1.5% last week and moving away from a one-year low of $1.0425. This left the dollar index steady at 105.790, after closing November with a gain of 1.8%, even after last week’s setback.
“Given the continued resilience of the US economy and the deteriorating outlook elsewhere, we don’t think this is the start of a deeper setback for the dollar,” said Jonas Goltermann, deputy chief market 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 until the end of the year seems to us the most likely scenario, although risks still remain in favor of the dollar through 2025.”
The key to the interest rate outlook will be the November payrolls report due Friday. Average forecasts indicate an increase of 195,000 after the October weather and strike report, which could also be revised given the low response to that survey.
The unemployment rate is expected to rise from 4.1% to 4.2%, which should keep the Federal Reserve on track to cut by 25 basis points on December 18.
Markets imply a 65% chance of such an easing, although they have also only priced in two cuts for all of 2025.
A host of Fed officials will speak this week, including Fed Chairman Jerome Powell on Wednesday, while other data includes surveys on the manufacturing and services sectors.
The European Central Bank is also cutting rates this month, with markets implying a 27% chance that rates will fall as much as 50 basis points on December 12.
Political uncertainty is another drag on the common currency as investors wait to see if the French government can survive the week intact.
The far-right leaders of France’s National Rally said on Sunday that the government had rejected its calls for more budget concessions, raising the possibility of a vote of no confidence in the coming days that could topple Prime Minister Michel Barnier.
The threat of a widening budget deficit brought French yields in line with those in Greece, while the gap with German yields reached the highest since 2012.
(Reporting by Wayne Cole; Editing by Sam Holmes)
