Dollar Slides as Wall Street Weighs Fed’s Likely Policy Path

Dollar Slides as Wall Street Weighs Fed’s Likely Policy Path

(Bloomberg) — The dollar fell the most in more than three weeks after U.S. data prompted some traders to bet on smaller Federal Reserve interest rate hikes ahead.

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The Bloomberg Dollar Spot index weakened 1.1% on Friday, the biggest decline since mid-December, after data showed slower-than-expected wage growth and weakness in a key gauge of US services.

While economic indicators prompted some traders to scale back their expectations for the pace of Fed rate hikes ahead, others on Wall Street were less convinced – especially as central bank officials stressed the need to fight inflation.

Atlanta Federal Reserve Bank President Raphael Bostic said he would be “comfortable” with a rate hike of 25 or 50 basis points for now. Meanwhile, Federal Reserve Bank of Kansas City President Esther George said officials have a tough road ahead in setting policy as they try to balance inflation and employment.

Investors will now turn their attention to next week’s inflation push and a series of speaking engagements from Fed officials – including Chairman Jerome Powell – for clues on the path of monetary policy.

Here’s what Wall Street strategists are saying:

Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole CIB

“The mix is ​​still positive enough for the Fed to keep hiking rates.”

“As such, I would think any downward correction in the USD could be shallow, with investors using the USD declines to position ahead of Powell and CPI next week.”

Erik Nelson, strategist at Wells Fargo

“The jobs report itself was actually quite strong in terms of employment growth, but the lack of another warm wage print is likely to keep the USD on its toes for now.”

“The ISM services index is what really lit a fire under the dollar weakness that we’re seeing here.”

“The Fed will probably put more weight on the ECI number later this month in deciding whether to raise 25 or 50 basis points.”

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Marc Chandler, chief market strategist at Bannockburn Global

Money managers had built bullish positions in the greenback ahead of the report with short-term “broad” indicators showing the currency was overbought.

“The economy is growing too fast and the labor market is too strong to allow inflation to fall back toward target in the kind of time frame that the Fed wants to avoid getting caught up in consumer and business expectations.”

Alejandro Cuadrado, head of global FX strategy at BBVA

“More important now is the secondary inflation reading than the gradual slowdown in employment.”

“The dollar has been strong in this first week of the year. The reading softens it a bit, but there are no bigger reasons for massive trend changes.”

(Updates dollar movement in second paragraph)

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