US Dollar Eases After Strongest Weekly Gain in Two Years Amid Market Adjustments

The U.S. dollar remained stable near a seven-week high on Monday as traders reevaluated their positions following robust employment data last week, while heightened geopolitical concerns in the Middle East fueled demand for safe-haven assets.

The U.S. labor market report for September showed a significant increase in nonfarm payrolls, the highest in six months, alongside a drop in unemployment and steady wage growth. This data led financial markets to temper expectations for aggressive U.S. interest rate cuts.

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Investors now anticipate the Federal Reserve will lower rates by just 25 basis points in November instead of the previously expected 50 basis points. According to the CME’s FedWatch tool, the probability of a quarter-point cut has risen to 85% from 47% just a week ago, leaving a minimal chance of no cut at all.

The U.S. 10-year Treasury yield surpassed 4% for the first time in two months, providing additional psychological support for the dollar.

Against the Japanese yen, the dollar declined after Atsushi Mimura, Japan’s top currency official, cautioned against speculative activity in the foreign exchange market. The dollar/yen exchange rate slipped 0.49% to 147.98 after touching a high of 149.10, its highest level since mid-August.

“The approach to the 150 level on the yen made the market more cautious, but this isn’t a major move yet,” commented Marc Chandler, Chief Market Strategist at Bannockburn Global Forex in New York.

The broader dollar index, which gauges the greenback’s strength against a basket of six major currencies, edged down 0.07% to 102.46 after hitting 102.69 on Friday, its highest level since mid-August. Last week, the index marked its largest weekly gain in two years, rising over 2%.

In the Middle East, escalating tensions were highlighted by Hezbollah’s rocket fire into Haifa, Israel’s third-largest city, on Monday, while Israeli forces appeared poised to expand their ground operations into southern Lebanon on the anniversary of the Gaza war, raising concerns of broader conflict in the region.

The euro experienced a slight decline, down 0.01% at $1.0975, pressured by a steeper-than-expected drop in German industrial orders for August, adding to worries about the sluggishness in Europe’s largest economy.

Overall, the outlook remained positive for the dollar as other traditional safe-haven currencies such as the yen and Swiss franc showed similar resilience amid heightened geopolitical concerns.

“In the current environment, the dollar, yen, and Swiss franc are the top performers as markets respond to risk aversion stemming from the situation in the Middle East,” said Brian Daingerfield, a forex strategist at NatWest Markets in New York.

The Swiss franc gained ground as the dollar dipped 0.45% to 0.854, while the Canadian dollar slipped 0.37% to 1.36 per U.S. dollar. The British pound fell 0.25% to $1.3083, retreating after Bank of England Governor Andrew Bailey hinted that the central bank might consider more aggressive monetary easing.

The Australian and New Zealand dollars also weakened, with the Aussie down 0.6% and the kiwi declining by 0.63%, reflecting a stronger dollar across most risk-sensitive currencies.

In the cryptocurrency market, bitcoin rose 1.49% to $63,334.40, and Ethereum climbed 1.13% to $2,456.20, continuing their upward trend amid the broader financial uncertainty.

Latest Currency Bid Prices (as of October 7, 3:26 p.m. EDT):

In summary, while the dollar’s strong performance last week has slowed, the overall market sentiment remains cautious as investors keep a close eye on geopolitical developments and central bank policy expectations.