Dollar edges higher but set for weekly loss; Fed's Williams in spotlight

Investing.com - The U.S. dollar edged higher in early European trade Friday, but remained on course for its steepest weekly decline since July after the Federal Reserve signaled rate cuts next year while central banks in Europe stuck to their hawkish paths.

At 04:15 ET (09:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 101.702, not far from the four-month low of 101.459 seen earlier Friday. 

The index is down over 2% this week so far.

Fed’s dovish pivot hits the dollar

Both the European Central Bank and the Bank of England expressed their desire to keep policy tight well into next year to combat inflation, as they kept interest rates unchanged on Thursday.

The ECB said policy easing was not even brought up in a two-day meeting, the BOE said rates would remain high for "an extended period."

This contrasted with the Fed's pivot towards rate cuts, and means that the dollar will remain out of favor as the year comes to an end.

“As the dust settles after a furious period for central bank meetings we are left to conclude that European policymakers have chosen to push back more than the Fed when it comes to what the market prices for 2024 rate cuts,” said analysts at ING, in a note.

There’s more U.S. economic data to digest later in the session, including November industrial and manufacturing production as well as S&P PMI numbers, but most focus will be on a speech by Fed policymaker John Williams, as the market looks for confirmation that the debate has moved on to the timing of the first rate cut. 

“Should Williams mention rate cuts, we suspect the dollar will stay on the soft side today,” ING added.

Euro, sterling fall back from recent highs

EUR/USD fell 0.3% to 1.0953, just below 1.1009, a two-week high it touched on Thursday, after PMI data showed that German business activity deteriorated in December, increasing the likelihood of a recession in Europe's biggest economy at the end of the year.

Still, while the ECB's next move should be a lowering of interest rates from record highs the central bank should "enjoy the view" for a while, French central bank chief Francois Villeroy de Galhau said on Friday, implying a rate cut was not imminent.

GBP/USD fell 0.2% to 1.2747, with sterling having surged 1.1% to a four-month peak on Thursday after BoE's hawkish tilt.

“Of the recent central bank meetings, the Bank of England probably offered the most pushback against dovish expectations,” said ING. “There was nothing in their statement to encourage dovish expectations for 2024.”

Yen steadies ahead of next week’s BOJ meeting

In Asia, USD/JPY traded 0.1% lower to 141.75, with the Japanese yen steadied near a four-month high to the dollar, having appreciated sharply against the greenback in recent sessions. 

But further gains in the yen were uncertain, with the Bank of Japan expected to maintain its ultra-dovish stance in its final meeting for the year next week.

USD/CNY traded 0.1% lower at 7.1035, after the People’s Bank of China injected 1.45 trillion yuan ($200 billion) into the economy through its medium-term lending facility.

Economic data also offered some positive cues on China. Industrial production grew more than expected in November, although retail sales and fixed asset investment missed expectations.

AUD/USD rose 0.3% to 0.6717, as the Aussie dollar, a major indicator of Asian risk sentiment, rose to an over four-month high.