Dollar Index Rises for Second Consecutive Day as Fed Rate Cut Bets Face Scrutiny

Stock News
02/17

The U.S. dollar has recorded modest gains for a second straight trading session, even as market pricing continues to imply around three interest rate cuts by the Federal Reserve this year. The Bloomberg Dollar Spot Index edged up 0.1%, supported by declines in other currencies within the basket, despite the Japanese yen strengthening approximately 0.4%. Sentiment indicators from the options market suggest a reduction in short-term bearish bets on the dollar, with near-term risk reversals showing the least negative level in nearly a month. Money markets are currently pricing in about 64 basis points of rate reductions by the Fed by year-end. Some strategists argue this expectation is too aggressive, noting that three cuts may exceed what recent economic data can justify, leaving the market vulnerable to a potential dollar rebound. Elias Haddad, Global Markets Strategy Head at Brown Brothers Harriman, commented that positioning for Federal Funds rate cuts appears somewhat excessive, creating room for a near-term repricing that could lift the dollar, citing resilient growth and core inflation that remains above the Fed's 2% target. With U.S. markets closed on Monday and a light economic calendar ahead of the release of the Fed meeting minutes and Friday's Personal Consumption Expenditures (PCE) data, investors have room for position adjustments in the absence of a clear macroeconomic catalyst. According to forex traders familiar with the activity, hedge funds were actively reducing their short dollar positions on Tuesday. These traders requested anonymity as they were not authorized to speak publicly. Analysts at Danske Bank, including Chief FX Analyst Jens Nærvig Pedersen, noted that January's stronger-than-expected jobs report has weakened the case for additional "insurance" rate cuts in the spring. They maintain their forecast for the Fed to cut rates in June and September, then hold rates in the 3.00%-3.25% range through 2027. Geopolitical risks have also returned to the forefront as a new round of U.S.-Iran nuclear talks approaches.

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