The U.S. dollar advanced as Fed rate cut bets decreased

The greenback rose across the board as the latest U.S. economic and inflation data, combined with the stronger-than-expected NFP jobs data for March, pushed back expectations that the Federal Reserve will cut interest rates as soon as June.

The DXY-dollar index, which tracks the greenback against six major peers is hovering close to the 6-month high of 105 mark as forex traders priced out June rate cut bets.

The considerably hotter-than-expected NFP-nonfarm payrolls report for March, which measures the change in the number of people employed during the previous month, excluding the farming industry, has kept the notion that the Fed will be in no hurry to trim rates soon.

The Labor Department’s Bureau of Labor Statistics reported last Friday that nonfarm payrolls grew by 303,000 in March, far above expectations for an increase of 212,000 and higher than the downwardly revised 270,000 gain in February, while the unemployment rate came out at 3.8%, as Wall Street had expected.

According to the CME Fedwatch tool, traders do not expect the Fed to adjust rates after its next FOMC (Federal Open Market Committee) meeting on May 01, while they now expect a roughly 46% chance of a 25 basis point cut on following FOMC meeting on June 12, down from 60% seen last week, while the expectations for a hold jumped to a 52% possibility from 35% seen last week. As a result, first-rate cut bets are now moving into July, while September is in play.

Rate-cut bets for June

At its last FOMC meeting, the Federal Reserve indicated that it still expects three rate cuts by the end of this year. But Minneapolis Fed President Neel Kashkari on Thursday became the latest high-profile figure to question whether there will be any rate cuts if inflation remains above the Fed’s 2% target, adding that the economy has been “very resilient.”

In this context, traders will be waiting for more cues on inflation and Fed actions this Wednesday, ahead of the key CPI-Consumer Price Index, and the minutes of the Fed’s March meeting.

Market reaction:

The U.S. dollar advanced across the board as the prospect of higher for longer U.S. interest rates sent the 10-year Treasury yields to a six-month high of 4.44%, while the 2-year yields rose to 4.78%.

As a result of the stronger dollar and the surging bond yields, Euro hit a monthly low of $1.0770 last week, before bouncing to a nearly $1.0850 resistance level, while the Pound Sterling fell back to the $1.25-$1.26 range level.

Meanwhile, the Japanese Yen is hovering near a 34-year low of ¥152 a dollar, as the ongoing dovish stance by the Bank of Japan, has been supporting the Fed-BoJ monetary policy divergence.

However, levels above ¥152 in the USD/JPY pair are expected to potentially attract intervention by Japanese authorities, after a slew of verbal warnings from Japanese ministers in recent weeks.

The dollar’s biggest gains this year have been against the two big funding currencies for carry trades, the Yen and the Swiss franc. Both are down roughly 7% each versus the dollar this year.