Dollar Weakens as U.S. Economic Data Fuels Expectations of December Fed Rate Cut

The U.S. dollar weakened on Tuesday as a mix of economic indicators, some delayed due to the recent government shutdown, reinforced market expectations that the Federal Reserve could cut interest rates next month. In late-morning U.S. trading, the euro rose 0.5% to $1.1577, while the British pound gained 0.6% to $1.3184. Meanwhile, the dollar index, which tracks the currency against its major peers, fell 0.5% to 99.746 after initially holding last week’s nearly 1% gain.

Analysts said the data suggested the U.S. economy may be slowing. Retail sales in September rose just 0.2%, below forecasts of 0.4% and down from August’s 0.6% gain. Producer prices increased 0.3%, in line with expectations, but core prices grew only 0.1%, lower than the anticipated 0.2%. Consumer confidence also dropped sharply to 88.7 in November from a revised 95.5 in October, signaling more cautious spending among Americans.

“Producer prices were stable and retail sales showed a modest consumer slowdown, keeping a December rate cut on the table,” said Scott Helfstein, head of investment strategy at Global X. Jennifer Lee, senior economist at BMO, added that the decline in confidence reflected “more worries about what lies ahead … putting purchases for major items on hold.” These figures add to dovish signals from Federal Reserve officials in recent days, reinforcing expectations of easing.

The market now prices in an 83% chance of a December rate cut, up sharply from 50% just a week ago, according to CME FedWatch. Comments from Fed Governor Christopher Waller and New York Fed President John Williams, highlighting a softer labor market, have further shaped these expectations. Analysts caution that thin liquidity around the Thanksgiving holiday and delayed economic data have created volatility, leaving the dollar vulnerable to further downside.

Other major currencies also showed movements against the dollar. The Japanese yen strengthened to 156.055 per dollar after hitting 10-month lows last week, while analysts noted the potential for Bank of Japan intervention. Francesco Pesole, a currency strategist at ING, said, “Unless markets have a hawkish rethink, the dollar looks too strong relative to short-term rate differentials, and we see material downside risks ahead.”

source: punch