The U.S. dollar soared to a 4-1/2-month peak against major peers on Tuesday as traders rushed to trim bets on the Federal Reserve’s first rate cut this year.
The dollar renewed a six-week high against the euro and was poised to do the same against sterling after US data on Monday unexpectedly showed the first manufacturing expansion since September 2022.
However, fears of intervention by Japanese officials slowed the dollar’s rise against the yen even as long-term U.S. Treasury yields – which typically track the currency pair – rose to a two-week high overnight.
Gold, which performs best when interest rates fall, found its feet after bouncing back from a record peak on Monday.
The U.S. interest rate futures market is now pricing in a 61.3% chance of a Fed rate cut in June, up from about a 70.1% chance a week ago, according to the CME’s FedWatch tool.
“The divergence between solid growth momentum for the US and declining risk of a Fed rate cut versus sluggish growth for other FX majors suggests that any DXY dips should be viewed as buying opportunities,” said Richard Franulovich, head of currency strategy at Westpac, referring to the dollar index.
“Targets near 106 look achievable from here,” for the dollar index, with 104.50 as support, he said.
The dollar index, which measures the currency against the yen, euro, pound sterling and three other peers, fell 0.05% higher to 105.05 after earlier reaching 105.07, matching Monday’s high .
The euro fell 0.08% to $1.07335, after plunging to $1.07295. Sterling was 0.04% lower at $1.25455, having fallen to $1.2541, just above the previous session’s low of $1.2540.
The Japanese yen strengthened slightly on Tuesday at 151.75 per dollar, after earlier falling to 151.79.
That was the weakest level since the yen hit a 34-year low of 151.975 on Wednesday, prompting Japan to step up warnings of intervention. On Tuesday, Finance Minister Shunichi Suzuki reiterated that he would not rule out any option to respond to disorderly currency movements.
Japanese authorities intervened in 2022 when the yen slid to a 32-year low of 152 against the dollar.
The yen’s decline comes despite the Bank of Japan’s first rate hike since 2007 last month, with officials cautious about further tightening amid a fragile exit from decades of deflation.
“This is a tricky situation” for Japanese officials, who are “guarding against backing themselves into a corner by drawing a line in the sand at 152,” said Nicholas Chia, Asia macro strategist at Standard Chartered.
“The rationale for clampdowns and intervention in the FX markets is primarily to buy time for the JPY in the hope that the USD will lose strength and decline.”
Elsewhere, China’s yuan fell to a 4.5-month low as a strong dollar offset selling of the US currency by state-owned banks. The yuan fell to a low of 7.2349 per dollar on the day, its weakest level since November 2023.
The Australian dollar was flat at $0.6490, after hitting a near one-month low of $0.64815 on Monday.
The New Zealand kiwi dollar fell 0.1% to $0.5947, moving back towards last night’s 4.5-month low of $0.59395.
Spot gold rose 0.22% to $2,255.27, after falling from a record high of $2,265.49 in the previous session.
The leading cryptocurrency bitcoin fell 4.4% to $69,707, after suddenly falling more than $3,000 in the space of about 15 minutes.
“There was a strange little air pocket (that) coincided with the start of trading in China,” with mainland blue chips starting the day weaker, said Kyle Rodda, senior market analyst at Capital.com.
“We have seen China’s opening recently as an intraday directional driver.”
