By Kevin Buckland and Jaspreet Kalra
TOKYO (Reuters) -The U.S. dollar nudged higher on Monday, but struggled to recover from a steep fall spurred by a dovish pivot from Federal Reserve Chair Jerome Powell that opened the door for a rate cut in the world’s largest economy next month.
The euro was down 0.1% at $1.1701 but remained in touching distance of Friday’s high of $1.174225, a level not seen since July 28. Sterling and the Swiss franc were both down about 0.1% as well.
Powell, in a closely watched speech at the Fed’s annual Jackson Hole symposium on Friday, signalled a possible interest rate cut at the U.S. central bank’s meeting next month, saying that risks to the job market were rising, while also noting inflation remained a threat.
Major brokerages, including Barclays, BNP Paribas and Deutsche Bank, now expect a 25-basis-point Fed rate cut in September following Chair Jerome Powell’s remarks.
Analysts at Bank of America, though, are sticking to their call for the Fed to keep rates unchanged next month, although they acknowledge risks have shifted towards a cut.
“We see a risk that the Fed could make a policy error by cutting just as activity rebounds, with inflation headed to 3%,” they said in a note.
Traders are now pricing in 87% odds of a quarter-point cut on September 17, up from around 70% before Powell delivered his speech, according to CME’s FedWatch tool.
Key upcoming data points include the Fed’s preferred inflation gauge, the PCE deflator, on Friday, and monthly payrolls figures for August, due a week later.
In addition to expectations around the Fed’s policy easing path, the dollar has also been weighed down by U.S. President Donald Trump’s attacks on Powell and other Fed policymakers that raised concerns about the central bank’s independence.
Fed Governor Lisa Cook became Trump’s latest target last week, and on Friday he said he would fire her if she did not resign over allegations about mortgages she holds in Michigan and Georgia.
YUAN BOOST
Elsewhere, the Chinese yuan leapt to the strongest level in a month, boosted by broad weakness in the dollar. Against the Japanese yen, the dollar nudged higher to 147.17 after slumping 1% on Friday.
Bank of Japan Governor Kazuo Ueda said in Jackson Hole on Saturday that wage hikes were spreading beyond large firms and likely to keep accelerating due to a tightening job market.
The remarks reinforced market expectations for the BOJ to resume raising rates soon, after it paused following a hike in January in order to gauge the effects of Trump’s aggressive global tariffs.
Homin Lee, senior macro strategist at Lombard Odier, sees the yen strengthening to the low 140s versus the dollar over a 12-month horizon, but expects it to be rangebound in the near term.
“We assume the window for the Bank of Japan’s next rate hike to be in January next year, not October,” Lee said.
“They’ll probably keep the real interest rate very low in the negative territory until the end of the year, and only consider gradual rate hikes.”
Traders currently put the odds of a hike by the BOJ’s October meeting at about a coin toss.
In cryptocurrencies, ether fell nearly 4% on Monday after touching a record high of $4,955.14 over the weekend. Bitcoin was down about 1% to $111,702.
(Reporting by Jaspreet Kalra and Kevin Buckland; Additional reporting by Summer Zhen; Editing by Christopher Cushing, Shri Navaratnam and Alex Richardson)
