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DOLLAR REBOUNDS ON FED EXPECTATIONS, AUSSIE DROPS The dollar clawed back from earlier losses on Monday as a hawkish Federal Reserve official laid out the case for further rate hikes, while the Australian dollar sank on concerns about unrest over COVID restrictions in China. The greenback rebounded in early U.S. trading and added to gains after St. Louis Fed President James Bullard said that the U.S. central bank needs to raise interest rates quite a bit further and then hold them there throughout next year and into 2024 to gain control of inflation and bring it back down toward the Fed’s 2% goal. Comments from Fed Chair Jerome Powell on Wednesday will be watched for any new signals on further tightening with key U.S. jobs data for November also due on Friday. The U.S. central bank is expected to hike rates by an additional 50 basis points when it meets on Dec. 13-14. FEDWATCH “The markets have hit a bit of a plateau about what they’re expecting. They know that the Fed’s going to raise rates, and that’s behind everything, but they’re not sure how much or when,” said Joseph Trevisani, senior analyst at The dollar index =USD has fallen to 106.65 from a 20-year high of 114.78 on Sept. 28 on expectations that its rally may have been overstretched and as the Fed looks to slow its pace of rate increases. Some of the recent decline is also likely due to investors and traders booking profits before year-end, said Trevisani, noting that many trading firms curtail activity in December. The dollar had dipped earlier on Monday despite other safe haven currencies the Japanese yen and the Swiss franc gaining on concerns about China. Hundreds of demonstrators and police clashed in Shanghai on Sunday night as protests over China’s stringent COVID restrictions flared for a third day and spread to several cities in the wake of a deadly fire in the country’s far west. Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said that the earlier decline in the dollar despite worsening risk appetite could reflect a shift in market sentiment towards the U.S. currency, but noted that it’s too soon to be certain. STERLING AT FRESH 16-WEEK HIGH AS DOLLAR TAKES A BEATING Sterling rose to a near 16-week high against a broadly-soft dollar on Thursday, with currency traders looking past gloomy British manufacturing data for now. The pound was last up 0.8% against the dollar at $1.2157, its highest level since Aug. 12, breaching the previous high of $1.2153 touched on Nov. 24. Sterling was also 0.6% higher versus the euro at 85.865 pence per euro. “There is not a great deal happening domestically, it’s a very dollar-focused week, particularly after Powell’s comments yesterday,” said Adam Cole, head of FX strategy at RBC Capital Markets. The dollar fell more than 1.5% to a three-month low against the yen on Thursday after U.S. Federal Reserve Chair Jerome Powell said U.S. rate hikes could be scaled back “as soon as December”. The pound has recovered ground from lows hit in September in the aftermath of then-Prime Minister Liz Truss’ mini-budget. Despite the uptick in recent months, the pound remains 10.3% lower on the year and traders are still focused on Britain’s gloomy economic outlook. Data on Thursday meanwhile showed British manufacturing activity falling for a fourth month in a row in November as businesses faced the weakest overseas demand in 2-1/2 years, leading to job cuts and reduced confidence about the year ahead. “Our longer term outlook for sterling is still negative and that is driven by the imbalances and the need for capital inflows, and all the reasons that have been there for some time,” said Cole. Inflation in the UK is still running at a four-decade high as households grapple with a cost-of-living crisis. Meanwhile the Bank of England (BoE) has been hiking interest rates since late 2021, tasked with bringing inflation back to its 2% target. DOLLAR SLIPS TO 5-MONTH LOW, YUAN SET FOR BIGGEST WEEKLY GAIN SINCE 2005 The dollar was pinned near a five-month low against a basket of major currencies on Friday ahead of key U.S. labour market data, while the yuan was set for its biggest weekly gain since China abandoned its dollar peg and revalued its currency in 2005. The dollar index, which measures the currency against six major peers including the yen and euro, fell 0.2% to 104.47, having earlier touched its lowest level since June 29 at 104.36. The index slipped over 5% last month on expectations that the Federal Reserve would start to slow its pace of rate hikes from the December meeting. Data released on Thursday supported that view, with the core personal consumption expenditures (PCE) price index coming in below expectations. The Fed tracks the PCE price indexes for its 2% inflation target. Fed chair Jerome Powell said on Wednesday that it was time to slow rate hikes, noting that “slowing down at this point is a good way to balance the risks.” “Over the past few days there was sufficient cause for pricing out dollar strength because not just Powell’s overall dovish speech, but also yesterday’s US data hit the same deflation spot,” Commerzbank analysts said in a note. Investors are now turning their attention to nonfarm payrolls data on Friday for clues on how rate hikes have affected the labour market. “Markets are really buying into the pivot story from the Fed,” said ING FX strategist Francesco Pesole, who noted sentiment is bearish on the dollar. “Considering what’s come from the inflation side, we’ll need to see strong payrolls numbers for the dollar to rebound,” Pesole added. The prospect of the Fed slowing its pace of monetary tightening has rejuvenated investor sentiment and sent the dollar tumbling after four straight 75-basis-point (bps) hikes that fuelled much of the greenback’s ascent this year. STERLING HOLDS NEAR FIVE-MONTH PEAK, SET FOR FOURTH WEEK OF GAINS The pound was set for a fourth straight week of gains, holding steady against the dollar at near five-month high it hit in the previous session as hopes of the United States nearing the end of its rate-hike cycle weighed on the greenback. Sterling was last trading at $1.22675 unchanged against the dollar on Friday, but was set for a weekly gain of 1.5%. It hit $1.231 on Thursday its highest since June 27, though the move was primarily dollar driven with the euro also touching a similar milestone. Cable – sterling/dollar – in recent weeks has largely traded in line with the moves of other G10 currencies against the dollar, a change from September and October when it struggled more than others and fell as low as $1.0372 after a budget announcement by Britain’s then finance minister Kwasi Kwarteng. “We are modestly bullish on sterling and part of that is related to the dollar narrative,” said Kristoffer Kjær Lomholt, head of FX, corporate research and chief analyst at Danske Bank. “The current account funding story that played out with the “mini-budget” and the uncertainty around that has been completely priced out, we see that both in real sterling terms and also real rates terms. All that has fully reversed from late September, early October.” The dollar index, which tracks the greenback against a basket of currencies, fell by 5% in November, its most since 2010. DOLLAR SLIPS AS EASING CURBS IN CHINA BUOYS RISK SENTIMENT The dollar slid across the board on Monday after a bruising week, weakening to below 7 yuan as sentiment toward riskier, non-dollar assets improved following signs of China easing some of COVID related restrictions. More Chinese cities, including financial hub Shanghai and Urumqi in the far west, announced an easing of coronavirus curbs over the weekend as China tries to soften its stance on COVID-19 restrictions in the wake of unprecedented protests against the policy. “It may seem like they are baby steps but nonetheless quite a strong sign of China taking calibrated steps in the direction of reopening,” said Christopher Wong, a currency strategist at OCBC. China is soon set to announce a nationwide easing of testing requirements as well as allowing positive cases and close contacts to isolate at home under certain conditions, people familiar with the matter told Reuters last week. The dollar slipped under 7.0 yuan in offshore trade, while the onshore yuan jumped roughly 1.4% to as high as 6.9507 on Monday morning, its strongest since Sept. 13. The dollar index, which measures the currency against six major peers including the yen and euro, was down 0.18% at 104.28, its lowest since June 28. The index fell 1.4% last week, capping off 5% drop for the month of November, its worst month since 2010, due to increasing expectations that the Federal Reserve is set to dial down the pace of its interest rate hikes after four consecutive 75 basis points increases. Investors’ focus will be on U.S. consumer price inflation data due out on Dec. 13, one day before the Fed concludes its two-day policy meeting. The U.S. central bank is expected to increase policy rates by an additional 50 basis points at the meeting. Fed funds futures traders are now pricing for the Fed’s benchmark rate to peak at 4.92% in May. OCBC‘s Wong said some degree of caution is still warranted as the Fed is not done tightening. “They are still tightening, it’s just that it is going to be in small steps.” Traders appeared to look past stronger-than-anticipated U.S. payrolls report for November on Friday after some of the Fed speakers allayed market concerns.