USD is heading for gains for the second week

The dollar is on track for its second consecutive weekly gain, driven by indications of the robustness of the US economy. The cautionary stance of central bank officials regarding an immediate interest rate cut has tempered traders’ expectations for a swift and substantial reduction.

Both the Australian dollar and New Zealand dollar are set to record their largest weekly gains since November and July, respectively, with expectations of a 1.6% and 2.3% increase. Market sentiments anticipate a 57% chance of interest rate cuts in March, down from 75% the previous week.

Richard Franulovich, head of Westpac’s foreign exchange unit, emphasized the impact of strong US activity data and central bank officials’ messages, indicating that markets are now reconsidering the timing and extent of a potential interest rate cut in 2024.

The dollar index climbed 0.9% to 103.4 points for the week, with the yen experiencing the most significant decline, down 5% so far this year. The yen fell approximately 0.2% against the dollar to 148.44.

The euro dipped 0.6% for the week to $1.0884, while the British pound saw a 0.4% decline to $1.2705.

The Australian dollar received support from stabilized iron ore prices, rising 0.1% to $0.6578. The New Zealand dollar settled at $0.6099.

Thursday’s data revealed the strength of the US labor market, with weekly unemployment claims dropping to their lowest level in nearly a year and a half, leading to a reduction in market expectations for interest rate cuts. Two-year Treasury yields rose 22 basis points during the week to 4.3587%.

Earlier data also indicated stronger-than-expected retail sales in December. Comments from Christopher Waller, a member of the US Federal Reserve’s Board of Governors, emphasized the flexibility of policymakers to move cautiously and slowly, further reducing expectations for imminent interest rate cuts.

Similar statements from European central bank officials contributed to the decline in expectations for a rate cut in Europe, limiting the euro’s losses against the dollar.