Dollar remains weak ahead of Fed meeting; euro near highs

Investing.com - The U.S. dollar steadied Thursday, but remains weak after recent lackluster economic data largely cemented the case for a rate cut from the Federal Reserve next week. 

At 04:50 ET (09:50 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded largely unchanged at 98.805, near a five-week low and almost 9% lower so far this year.

Fed meeting looms large

Weak U.S. economic data has bolstered expectations for a Fed rate cut next week, weighing heavily on the U.S. currency.

“After yesterday’s 32k drop in ADP payrolls, a Fed cut next week looks even closer to a certainty,” said analysts at ING, in a note. The OIS curve is pricing in 25bp, meaning the Fed would face a potentially sharp adverse reaction in risk assets should it decide to hold.”

At the same time, the bank added, there is only another 15bp priced in by March, meaning that expectations are firmly on a hawkish cut in December. 

“Our view remains that data will justify two more cuts early next year, which underpins our view that the dollar won’t make a comeback even in the seasonally favorable first quarter.”

The dollar has also been pressured by U.S. President Donald Trump stating this week he will unveil his pick to succeed Jerome Powell as head of the Federal Reserve early next year, extending a months-long selection process despite previously claiming he had already decided on a candidate.

A move to appoint White House economic adviser Kevin Hassett could pressure the dollar, analysts have said, with bond investors expressing concerns to the U.S. Treasury that Hassett could aggressively cut rates to align with Trump’s preferences, the Financial Times reported.

Euro nears seven-week high

In Europe, EUR/USD rose 0.1% to 1.1677, after climbing to its highest level in nearly seven weeks and on pace for annual gains of almost 13%, which would be its biggest annual gain since 2017.

“We continue to have 1.170 as our EUR/USD target for next week’s Fed meeting and 1.180 as our year-end target,” said ING. “Seasonality should help, but it’s also worth noting that our short-term fair value model continues to point to around 1.1% undervaluation in the pair.”

The European Central Bank is due to meet in two weeks and is widely expected to stand pat on rates, having cut rates by a combined 2 percentage points in the year to June before pausing ever since. 

GBP/USD fell 0.1% to 1.3340, dropping after a survey showed that British construction activity contracted last month at the fastest pace since May 2020.

S&P Global’s monthly purchasing managers’ index for the construction industry fell to 39.4 in November from 44.1 in October, extending its longest downturn since the global financial crisis and remaining well below the 50 mark that divides growth from contraction.

Aussie dollar gains more 

In Asia, USD/JPY slipped 0.2% to 154.96, with the Japanese yen firming as investors remain focused on U.S. economic data that has bolstered expectations for a Fed rate cut.

USD/CNY traded 0.1% higher to 7.0691, while AUD/USD gained 0.3% to 0.6615, with the Australian economy showing more signs of strength.