The US dollar held near a three-month high on Monday (November 3rd) ahead of economic data this week that will provide only vague clues about the health of the US economy and could reinforce the Federal Reserve's cautious stance.

The Fed cut interest rates by 25 basis points last week, as expected, but Chairman Jerome Powell hinted that it might be the central bank's last cut of the year, citing the risk of taking additional steps without a stronger economic picture.

Were it not for the ongoing US government shutdown, this week's scheduled data releases, including US non-farm payrolls, would have helped improve the picture.

However, with government data releases likely to be delayed again, investors will be focused on the ADP employment data and the ISM PMI, although these are unlikely to significantly change the direction of the economy. Several Fed presidents on Friday voiced discomfort with the policy easing decision, and traders now price in a 68% chance of a 25 basis point (bps) interest rate cut in December, having seen such a possibility ahead of last week's meeting.

The yen stood at 154.1 per dollar, near an 8.5-month low, pressured by wide interest rate differentials. Meanwhile, the euro weakened 0.16% to $1.1513, a three-month low, and the pound weakened 0.4% to $1.3118.

This caused the dollar index, which measures the greenback against a basket of six major currencies, to rise 0.16% to 99.89, its highest level since August 1. The index has traded in a tight range between 96 and 100 for the past six months.

"All eyes are on whether the dollar can break through that range, and whether the rebound has legs," said Lee Hardman, senior currency analyst at MUFG, adding that the main driver of the dollar's strength is a hawkish price adjustment to Fed expectations.

The pound and yen are facing their own share of pressure. Although Bank of Japan Governor Kazuo Ueda last week sent the strongest signal yet that an interest rate hike could come as soon as December, markets remain unimpressed with the central bank's gradual approach, especially given the Fed's shift to a more hawkish stance.

This has added pressure on the yen, prompting Japanese authorities to try to curb the currency's decline. The yen is approaching levels where Japanese authorities will intervene in the market in 2022 and 2024 to support the currency.

"The yen could start to get more support as markets start to worry about intervention as we approach those levels, although I don't think it's enough to turn things around on its own," Hardman said. The yen also held near a record low last week against the euro, last trading at 177.4.

Sterling weakened as market expectations for a Bank of England interest rate cut this year increased following weaker-than-expected inflation data released last month. The Bank of England will meet this week, with some analysts expecting a 25 basis point cut, although market pricing reflects only a one-in-three chance of that happening.

The Aussie edged up 0.1% to $0.6554, supported by expectations that the Reserve Bank of Australia will keep interest rates unchanged on Tuesday, following an overly high core inflation reading, while the dollar rose 0.27% to 0.8067 Swiss francs, its highest level in more than three weeks. (alg)

Source: Reuters