Dollar rebounds as traders pare Fed rate cut bets By Reuters

By Rae Wee

SINGAPORE (Reuters) -The dollar edged higher on Thursday as investors reassessed their expectations of the scale of rate cuts by the Federal Reserve this year, with caution hanging over markets after an impressive risk rally last month.

The greenback pushed to an over two-week top against the yen in Asia, as trading returned to full swing with Japan back from an extended New Year break.

Against the yen, the dollar peaked at 143.90 and last changed hands at 143.75, having jumped more than 0.9% against the Japanese currency in the previous session, its best day since October.

The Australian dollar, often used as a proxy for risk appetite, struggled to break away from Wednesday’s two-week low of $0.6703 and last bought $0.6744.

The risk-sensitive New Zealand dollar changed hands at $0.6266, having similarly touched a two-week low of $0.6221 in the previous session.

Minutes of the Fed’s December policy meeting released on Wednesday showed officials were convinced inflation was coming under control and were concerned about the risks of the central bank’s “overly restrictive” monetary policy on the economy.

However, there was no clear-cut clues on when the Fed could begin easing rates, with policymakers still seeing a need for rates to stay restrictive for some time.

“The messaging that rates will stay elevated raises a second look at the aggressive cut expectations markets are pricing,” said Christopher Wong, a currency strategist at OCBC.

“Global growth concerns, risk-off sentiment in U.S. equities and markets partially unwinding some of their aggressive bets on Fed cuts are some of (the) factors driving the U.S dollar rebound so far.”

Against a basket of currencies, the greenback rose 0.03% to 102.43, flirting with a three-week peak of 102.73 hit in the previous session.

The euro was nursing losses and rose 0.09% to $1.0931, while sterling remained pinned near its recent three-week low at $1.2667.

Separate data out on Wednesday showed U.S. manufacturing contracted further in December, though the pace of decline slowed, while U.S. job openings fell for the third straight month in November, pointing to easing labour market conditions.

Recent data pointing to a cooling U.S. economy have continued to underpin bets of Fed rate cuts this year as inflation comes under control, though traders remain divided over the pace and scale of easing from the central bank.

Market pricing now shows a roughly 72% chance that the Fed could begin cutting rates in March, compared with an 87% chance a week ago, according to the CME FedWatch tool.

The closely watched U.S. nonfarm payrolls report is due on Friday, which will likely give further clarity on how much room the Fed has to lower rates.

In geopolitics, Hezbollah in Lebanon and the Israeli army made statements suggesting the two avowed enemies wanted to avoid the further spread of war beyond the Gaza Strip, after a drone strike killed a Palestinian Hamas deputy leader in Beirut.