Dollar retreats in thin volumes; Fed monetary policy in focus

The U.S. dollar edged lower in thin holiday-affected volumes Friday, amid uncertainty of the future path of U.S. interest rates.

At 03:00 ET (08:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.3% to 103.555, just above the two-and-a-half month low of 103.17 it touched earlier this week.

Dollar on course for hefty monthly loss
Volumes are likely to be limited Friday due to a shorter U.S. trading session after Thursday’s Thanksgiving holiday.

That said, the dollar index is still on course for a monthly loss of around 2.5%, which would be its weakest monthly performance in a year, on growing expectations that the Federal Reserve could start cutting rates next year after ending its rate-hiking cycle at its meeting at the start of this month.

Even though it’s a half day in the U.S., there is still important economic data to study, in the form of manufacturing and services PMI data for November, which should provide evidence of how resilient the U.S. economy has been.

This data “has triggered a growing market impact, but may fail to decisively steer the dollar in a low-volume day,” said analysts at ING, in a note.

Euro gains; German recession could be shallow
In Europe, EUR/USD rose 0.1% to 1.0909, having risen 0.2% overnight after PMI data indicated a recession in Germany may be shallower than expected.

Data released Friday showed that Europe’s largest economy shrank 0.1% in the third quarter compared with the previous three months, confirming an initial estimate, published in late October.

That said, policy makers from the European Central Bank have been keen to warn that the central bank pausing its streak of 10 consecutive rate hikes at its October meeting doesn’t mean rate cuts are just around the corner.

“The notion that recessionary pessimism may have peaked in the eurozone is a positive for EUR/USD, but whether this can offer support to the pair already in the near term is a different question,” ING added.

GBP/USD rose 0.2% to 1.2553, in the wake of Chancellor Jeremy Hunt’s measures to boost growth before next year’s election.

“The tax cuts announced by the Treasury are, on paper, a sterling-positive. They are both pro-growth and pro-inflation and do not seem to have excessively unnerved the bond market,” said ING.

Japanese CPI grows less than expected
In Asia, USD/JPY traded 0.1% lower at 149.50, with the yen helped by the dollar weakness, even after the release of data showed that Japanese consumer inflation grew slightly less than expected in October.

The reading, coupled with weak PMI data for November, give the Bank of Japan more headroom to maintain its ultra-dovish policy.

USD/CNY rose 0.1% to 7.1524, although the yuan is heading for its fourth straight week of gains.

Traders now await PMI readings from China next week, amid persistent concerns over a sluggish economic rebound, which could test the yuan’s rebound from an over one-year low.