US Dollar steady as data gives few clues on further Fed rate hikes
Frankfurt (Dec 23) The dollar held steady in thinned trading on Wednesday after data painted a mixed picture of the U.S. economy, offering investors few clues as to how fast the Federal Reserve will raise interest rates next year.
After the Fed's widely anticipated interest rate hike last week, attention has turned to the pace of rate rises. Markets are fully pricing in two increases in 2016, although Fed policymakers are signaling four.
A mixed set of numbers on Tuesday showed that U.S. gross domestic product (GDP) grew at 2 percent in the third quarter, slightly slower than the initial estimate. Core personal consumption expenditure (PCE), the Fed's preferred inflation measure, rose to 1.4 percent, slightly above expectations.
U.S. consumer spending rose in November by 0.3 percent, according to data inadvertently released 12 hours ahead of schedule. But other data reports showed that U.S. home resales unexpectedly plunged 10.5 percent in November, their steepest drop since July 2010.
The dollar index, which tracks the greenback against a basket of six currencies, was 0.2 percent higher at 98.46 after three losing sessions, with the euro 0.36 percent down at $1.0914.
"Yesterday's soggy U.S. data keeps Treasury yields firmly in their ranges and with euro/dollar faithfully following the Bund/Treasury spread, I can't see much to drive that cross out of its range," wrote Societe Generale macro strategist Kit Juckes.
Volume was thin, with many participants away for this week's Christmas holiday.
Why next year’s dollar move could be historic
Credit Agricole currency strategist Manuel Oliveri said that subdued risk appetite could boost the euro in the coming days. The currency has performed well this year at times of risk aversion, as investors have unwound euro-funded carry trades in which the euro is borrowed then sold for higher-yielding, riskier currencies.
"When you are in an environment where rate expectations are stable, the euro is mostly driven by risk sentiment," he said. "So we could imagine that the euro goes to $1.10 or so into the end of the year."
A downward revision to 0.4 percent for UK GDP had little impact on sterling, which was 0.26 percent up at $1.4867. It had hit an eight-month low of $1.4806 on Tuesday, with analysts citing growing concerns about a British exit from Europe following a referendum on the issue which could be held as early as June.
"The referendum is keeping uncertainty high and demand for sterling low, and ... that should continue for the coming weeks and months," Oliveri said.