Dollar holds near three-week high as bets on sharp U.S. rate cut drop

 

The dollar held near three-week highs on Monday, keeping its gains after last week’s strong U.S. jobs data lowered expectations for a sharp Federal Reserve interest rate cut.

Elsewhere, the Turkish lira fell steeply after President Tayyip Erdogan dismissed the central bank governor, sparking worries about the bank’s independence.

U.S. non-farm payrolls rebounded in June, rising 224,000, the most in five months.

The forecast-beating job gains virtually ended the chances for a half-point Fed rate cut at the end of July, although modest wage gains and other data showing the world’s largest economy was losing steam means the central bank is still expected to cut rates by a quarter point.

“We still expect the Fed to deliver a 25 basis point rate cut this month. The underlying trend for employment growth is still weakening,” MUFG analysts wrote in a research note.

“Nevertheless, the U.S. dollar should continue to trade on a firmer footing in the near term, given downside risks from a larger rate cut have diminished.”

The dollar index stood at 97.233 .DXY, down marginally on the day but near the 3-week high of 97.443 hit on Friday.

The greenback’s rebound follows a period of weakness as mounting expectations for Fed rate cuts weighed.

The euro, which dropped to $1.1208 EUR=EBS on Friday, traded at $1.1227, unchanged on the day.

The common currency has been under pressure from dollar strength and data showing weakness in the German industrial sector.

Traders are now focused on Federal Reserve Chairman Jerome Powell’s Congressional testimony, due on Wednesday and Thursday, as well as U.S. inflation data out later this week.

The British pound, which hit a six-month low below $1.25 on Friday after poor economic data and on heightened expectations that the Bank of England will cut interest rates in 2020, edged down to $1.2530 GBP=D3.

Turkey’s lira slid to as low as 5.8245 to the dollar TRYTOM=D3, its lowest in two weeks, and was last down 1.7% at 5.73.

“Some naive market participants might still hope that the new central bank governor will come across as being independent in a statement announced for this week and at least does not cut interest rates right away,” Commerzbank analysts said.

 

“That may be the case but does not change the fact that medium term sensible Turkish monetary policy will not be possible.”

In a written statement on Saturday, new governor Murat Uysal said he would implement monetary policy instruments independently with a focus on achieving and maintaining the primary objective of price stability.

Japan’s yen traded at 108.45 yen per dollar JPY=EBS, up 0.1% on the day and above Friday’s 3-week low of 108.64 yen.