US dollar heads for second week of gains as interest rate cut expectations recede

US dollar is heading for gains for the second week in a row on Friday, as evidence of the strength of the US economy and caution from central bank officials regarding lowering interest rates led to a decline in traders’ expectations of a rapid and sharp cut.

According to Reuters, the weekly gains for the Australian dollar of 1.6% and the New Zealand dollar of 2.3% are expected to be the largest since November and July, respectively. Market traders expect 57% of interest rates to be reduced in March from 75% a week ago.

“The strong message sent by US activity data and central bank officials is that markets are taking a sharp interest rate cut in 2024, both in terms of timing and percentage,” said Richard Franulovich, head of Westpac’s foreign exchange unit.

He continued, “This, in addition to a new bout of turmoil in the real estate and financial markets in China, led to the dollar returning to its strength.”

The dollar index rose 0.9% to 103.4 points during the week, and the yen was the biggest loser, having fallen 5% so far this year, as the data and the devastating earthquake shook confidence that the Bank of Japan is about to raise interest rates.

The yen fell by about 0.2% to 148.44 against the dollar, while the euro fell by 0.6% during the week to $1.0884, and the British pound fell by 0.4% to $1.2705.

The Australian dollar received some support from the stability of iron ore prices and rose 0.1% to $0.6578.

. Christopher Waller, a member of the Board of Governors of the US Central Bank, said on Tuesday that the strength of the US economy gives policy makers flexibility to move “cautiously and slowly,” which traders saw as evidence that lowering interest rates will not happen quickly.

Similar statements from European central bank officials also led to a decline in expectations for a rate cut in Europe, which limited the euro’s decline against the dollar.