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Tokyo- The dollar is set to halt a two-week rally as unexpectedly weak data for August forced investors to reassess whether the US economy is strong enough for the Federal Reserve to raise interest rates this month.
The greenback fell against all of its 10 major peers this week as the futures-based odds of a September 21 rate increase dropped four percentage points to 28%. The Institute for Supply Management’s services gauge declined to a six-year low on Tuesday.
Markets will look to next week’s retail sales report for additional clues and to a September 12 speech by Lael Brainard, a member of the Fed’s board of governors, amid speculation she might strike a hawkish tone.
“The underlying current for the dollar is that its upside is capped as markets aren’t pricing in successive rate increases,” said Shinsuke Sato, head of the currency trading group at Sumitomo Mitsui Banking in Tokyo.
Trades are seeing just one hike this year, and possibly next year as well, he said, adding “the yen gained as some bullish bets from yesterday were unwound on speculation about a more hawkish tone from Brainard.”
Currency 5-Day Change, % YTD Change, % Swedish Krona 1.9 0.1 Yen 1.8 18 Norwegian Krone 1.8 8.2 Kiwi 1.6 8.3 Euro 1.1 3.8 Aussie 1 5 Pound 0.2 -9.6
The Bloomberg Dollar Spot Index, which measures the currency against a basket of 10 peers, fell 0.2% as of 07:30, taking its weekly decline to 0.9%. It rose 1.5% in the preceding two weeks on speculation senior Fed officials, including Chair Janet Yellen, were willing to raise rates this year.
The yen rose 0.4% to ¥102.13/$ and was set for its first advance in three weeks.
The drop in the ISM’s services gauge was the latest in a string of weak data for last month. Other less-than-stellar figures include an ISM factory survey showing a contraction in manufacturing; a cooling of hiring; automobile sales falling short of forecasts; and an index of consumer sentiment at a four-month low.
“This week’s ISM pared expectations for the Fed’s rate hike this month,” said Yasuhiro Kaizaki, vice president for global markets at Sumitomo Mitsui Trust Bank in New York. “In order for the dollar to bounce back, rate-hike expectations have to heighten. The market will need fresh factors and that may not come until retail sales next week.”
