Dollar Bounce Back Ahead of Key Fed Speech

The dollar rebounded from a 13-month low against the euro before Federal Reserve Chair Jerome Powell's upcoming speech. Market speculation on interest rate cuts by the Federal Reserve remains mixed. The financial sector is closely watching Powell's remarks for indicators on the size and frequency of potential rate cuts.

The dollar rebounded from a 13-month low against the euro on Thursday before Federal Reserve Chair Jerome Powell is due to speak on Friday, amid speculation that the greenback's recent weakness might have been overblown. The U.S. currency has declined due to concerns about a weakening economy and expectations that the Federal Reserve is close to cutting interest rates. However, the extent of this decline and the implications for a potential rate cut of 25 or 50 basis points at the upcoming meeting remain uncertain.

Following July's employment report, which showed fewer job gains than expected and a rise in the unemployment rate, the odds of a 50 basis point cut initially increased but have since diminished as other data suggested better economic growth. According to the CME Group's FedWatch Tool, traders now see a 27% chance of a 50 basis point cut and a 73% chance of a 25 basis point reduction next month.

Brad Bechtel, global head of FX at Jefferies, stated, "The dollar has been under a lot of pressure recently but I think it's getting to a place where it's quite a bit oversold. We've backed away a little bit from that sort of emergency place we got to after the payroll print, but the dollar seems to be pricing as if we're still in that emergency state."

Attention is now on Powell's comments at the Kansas City Fed's Jackson Hole symposium for hints on the anticipated September rate cut and future policy actions. Powell may refrain from providing too much clarity ahead of critical jobs and inflation data due in August, but the sentiment remains cautious in light of the Fed's previous discussions.

Minutes from the Fed's July meeting revealed strong support for a September rate cut. High-level endorsements came from officials such as Philadelphia Fed President Patrick Harker and Boston Fed President Susan Collins, provided the data aligns with their expectations.

Despite rising new applications for unemployment benefits, data indicates a gradual cooling of the labor market. On the European front, though economic growth remains tepid, the weakening dollar might still be overestimated relative to the euro and sterling. The dollar index showed a minor uptick, with the euro and sterling both softening slightly.

In contrast, the dollar appreciated against the Japanese yen as market participants anticipated discussions about interest rates by Bank of Japan Governor Kazuo Ueda. The cryptocurrency market saw bitcoin decline to $60,605. (Reporting By Karen Brettell; Additional reporting by Kevin Buckland and Alun John; Editing by Christina Fincher)

(With inputs from agencies.)