The dollar fell against a basket of currencies on Monday as traders anticipated the testimony of Federal Reserve Chair Jerome Powell and the release of jobs data later this week for more clues about how much higher interest rates are likely to rise from the U.S. central bank.
The key events this week that “really substantiate the data that we got last month with respect to the January” numbers, according to Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto, are Powell’s testimony before Congress on Tuesday, Wednesday, and Friday’s jobs report.
The dollar index has bounced off a nine-month low of 100.80 reached on Feb. 1 as strong data and still-high inflation leads investors to reprice for higher rates for longer. The index was last down 0.26% on the day at 104.35.
January’s jobs report released on Feb. 3 showed that employers unexpectedly added 517,000 jobs, while the unemployment rate hit more than a 53-1/2-year low of 3.4%, pointing to a stubbornly tight labor market.
That “seems a bit suspicious at the surface, so a lot of the data that we get this week will tell us whether or not that’s really more than just suspicious or more than, say, seasonal adjustment trends, and actually something there that the Fed is getting wrong in terms of how tight the labor market is and what that means potentially for inflation,” said Rai.
Data on Monday showed that new orders for U.S.-manufactured goods fell in January, pulled down by a plunge in civilian aircraft bookings.
The New York Fed also said that global supply chains have “returned to normal,” with pressures dropping to the lowest since before the COVID-19 pandemic.
Powell’s testimony will be watched for any new signals on whether the U.S. central bank could reaccelerate the pace of rate hikes in response to the recent data. After delivering jumbo hikes last year, the Fed has raised interest rates by 25 basis points each at its last two meetings.
Fed funds futures traders are pricing in a 76% probability the Fed will raise rates by 25 basis points at its March 21-22 meeting, and a 24% likelihood of a 50 basis points increase.
Analysts also note, however, that the Fed may be reluctant to increase the pace of rate hikes again as it would likely spook investors by indicating that the bank made a mistake in switching to 25 basis point increases.
The Chinese yuan and Aussie dollar fell after China on Sunday set a lower-than-expected target for economic growth this year of around 5%.
“China’s 5% growth target… underwhelmed, supporting our view that there is an overly optimistic view of China reflation that could challenge some FX proxies,” analysts at TD Securities led by Mark McCormick said in a report.
The greenback gained 0.81% against the offshore yuan to 6.9519 per dollar, while the Aussie, often traded as a liquid proxy for the yuan, dropped 0.67% to $0.6723 .
The euro was last up 0.35% on the day at $1.0671, while sterling was down 0.20% at $1.2019.
The dollar gained 0.15% to 136.02 yen ahead of the final policy meeting for Bank of Japan Governor Haruhiko Kuroda on Thursday and Friday.