Dollar set for strong weekly rise as markets anticipate fewer rate cuts

NEW YORK/LONDON :The U.S. dollar was set for its biggest weekly gain in over a month on Friday, as markets reassessed expectations of future interest rate cuts and with the view that President-elect Donald Trump's policies could stoke inflation.

The dollar has benefited from market expectation that Trump administration policies, including tariffs and tax cuts, could stoke inflation, leaving the Federal Reserve less room to cut interest rates.

Fed Chairman Jerome Powell said on Thursday the U.S. central bank did not need to rush to lower interest rates, prompting traders to axe their more aggressive bets on a rate cut next month and beyond.

The greenback was set to notch a weekly gain against the Japanese yen after it traded above 156 yen this week for the first time since July. It was last down 0.9 per cent to 154.94 per dollar.

The euro was headed for the second straight week of losses after slumping to its lowest level since October 2023. It was flat at $1.053050.

"Today is really just an ahead-of-weekend consolidation; we haven't taken out any key levels like 106 in the euro like 127 in sterling," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

"The market overreacted to Powell yesterday, but U.S. interest rates are still firm. So whatever forces were unleashed by the U.S. election, they haven't been exhausted yet."

Commerce Department data on Friday showed that U.S. retail sales increased slightly more than expected in October, but underlying momentum in consumer spending appeared to slow at the start of the fourth quarter.

Boston Fed president Susan Collins in comments published Friday in the Wall Street Journal also said rate cuts could be paused as soon as the Dec. 17-18 meeting, depending on upcoming data on jobs and inflation. The probability of a December cut has dropped to around 57 per cent from closer to 82 per cent a day ago, according to CME's FedWatch tool.

Sterling was on track for its steepest weekly fall since January 2023, at roughly 2 per cent. It was last down at $1.26290. The pound showed little reaction to data showing Britain's economy contracted unexpectedly in September and growth slowed to a crawl over the third quarter.

The dollar is trading around a one-year high against a basket of currencies at 106.81, having risen nearly 1.73 per cent this week, set for its best performance since September. It was last down 0.13 per cent at 106.74

In cryptocurrencies, bitcoin traded just below $90,000, as some investors took profits after a stellar run. Bitcoin fell 0.25 per cent to $88,091.00. Ethereum declined 2.99 per cent to $3,025.61.