Fed rate cut bets send dollar to near five-week low

By Joice Alves

LONDON, Dec 5 (Reuters) – The dollar index fell on Friday, trading not far from a five-week low ahead of the delayed release of a key U.S. inflation reading, which is not expected to change bets the Federal Reserve will cut interest rates next week.

The dollar was particularly weak against the yen, with the Japanese currency buoyed to a nearly three-week high by expectations that the Bank of Japan could raise rates this month.

The dollar index, measuring the currency against six peers, was down 0.1% at 98.981, heading back towards Thursday’s five-week low of 98.765.

One of the Fed’s preferred inflation gauges – the PCE deflator – will be published later on Friday, although the data is for September. Economists surveyed by LSEG expect a 0.2% monthly increase in the core number.

That is not seen changing expectations the Fed will cut rates by a quarter-point when the policy-setting Federal Open Market Committee meets on December 9-10, and the focus will be on any signals about how much additional easing lies ahead. 

Traders are pricing an 86% chance of a Fed cut next week, and potentially two more reductions next year, LSEG data showed.

Investors are also weighing the prospect of White House economic adviser Kevin Hassett taking over as Fed Chair after Jerome Powell’s term ends in May. Hassett is expected to push for more rate cuts.

The dollar “remains slightly offered on the view that the Fed will cut rates next week and that the arrival of Kevin Hassett as Fed Chair will somehow make the Fed more dovish,” said Chris Turner, Global Head of Markets at ING.

The U.S. labour market has also been in focus, as an indication for the Fed to determine whether the economy needs further support. 

Data overnight showed the number of Americans filing new applications for unemployment benefits fell to a more than three-year low last week, but may have been skewed by the Thanksgiving holiday.

The data picture remains incomplete after the record-long government shutdown delayed some releases and prevented other data from being collected.

Crucial monthly payrolls figures would ordinarily be published later on Friday, but have been delayed until mid-December, and the previous month’s numbers were never released.

YEN EYES BOJ HIKE

Elsewhere, the dollar dropped 0.12% to 154.92 yen, after hitting its lowest since November 17.

BOJ officials are ready to raise rates on December 19, in the absence of any major economic shocks, Bloomberg reported on Friday, a day after Reuters reported three sources as saying a hike this month was likely.

The euro gained 0.1% to $1.1651, heading back towards Thursday’s three-week high of $1.1682.

Sterling added 0.15% to $1.3346, approaching the previous session’s six-week peak of $1.3385.

Next week sees a parade of central bank policy decisions, with the Reserve Bank of Australia’s coming on Tuesday, the Bank of Canada’s on Wednesday and the Swiss National Bank’s on Thursday.

That continues the following week with the BOJ, European Central Bank, Bank of England, and Sweden’s Riksbank.

The Aussie was up 0.3% to $0.6626, after touching a more than two-month high.

The Swiss franc gained 0.1% to 0.8029 per dollar after dropping back sharply from Wednesday’s two-week high of 0.7992 in the previous session.

(Reporting by Joice Alves in London and Kevin Buckland in Tokyo. Editing by Mark Potter)

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