Dollar Slides as Wall Street Weighs Fed’s Likely Policy Path

(Bloomberg) — The dollar plunged by the most in more than three weeks as US data prompted some traders to bet on smaller Federal Reserve interest-rate hikes ahead.

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The Bloomberg Dollar Spot Index weakened 1.1% on Friday, the biggest drop since mid-December, after data showed slower-than-expected wage growth and weakness in a key US services gauge.

While the economic indicators prompted some traders to pare back their expectations for the pace of Fed rate increases ahead, others on Wall Street were less convinced — especially after central bank officials stressed the need to combat inflation.

Federal Reserve Bank of Atlanta President Raphael Bostic said he would be “comfortable” with either a 25- or 50-basis-point rate increase at the moment. Kansas City Federal Reserve Bank President Esther George, meantime, said officials have a tough road ahead in determining policy as they try to balance inflation and employment.

Investors will now turn their attention to next week’s inflation print and a string of speaking engagements from Fed officials — including Chairman Jerome Powell — for clues on the path of monetary policy.

Here’s what strategists on Wall Street are saying:

Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole CIB

“The mix is still positive enough for the Fed to keep hiking rates.”
“As such, I would think that any downward correction in the USD could be a shallow one, with investors using USD dips to position ahead of Powell and CPI next week.”

Erik Nelson, strategist at Wells Fargo

“The jobs report itself was actually quite strong in terms of employment growth, but the lack of another hot wages print likely keeps USD on the back foot for now.”
“The ISM services index is what really lit a fire under the dollar weakness we are seeing here.”
“The Fed will probably put more weight on the ECI number later this month in determining to hike 25 or 50 basis points.”

Marc Chandler, chief market strategist at Bannockburn Global

Money managers had built up bullish positions on the greenback ahead of the report with “stretched” short-term indicators that showed the currency was overbought.
“The economy is growing too fast, and the labor market is too strong to allow inflation to fall back toward target in the kind of time frame the Fed want to avoid it being embedded into consumer and business expectations.”

Alejandro Cuadrado, head of global FX strategy at BBVA

“More important now is the secondary inflation read rather than the gradual employment deceleration.”
“The dollar has been strong in this first week of the year. The read softens it a bit but no bigger reasons for massive trend changes.”

(Updates dollar move in second paragraph)