U.S. dollar hits one-month low as traders sharply cut Fed rate hike expectations

Traders cut expectations for the Federal Reserve to continue raising interest rates in 2022 after revised data on Thursday showed the U.S. economy contracted more than expected in the first quarter.

Traders see a 60% chance that the target range for the federal funds rate will rise to 2.5%-2.75% by December, up from 35% a week ago, according to CME FedWatch data. But the chance that policymakers will hit their 2.75%-3% target range by the end of the year fell to 27% from 51% on May 19.

The first-quarter GDP contraction was accompanied by a decline in corporate profits for the first time in five quarters, which analysts believe suggests the economic contraction is more real than first thought after accounting for a record trade deficit.

Investors have been focused on how much tightening the Fed needs to do to bring down inflation at 40-year highs, while questioning whether the Fed will be forced to scale back due to a possible economic slowdown.

Minutes of the Fed’s May meeting released on Wednesday showed that most participants see a 50 basis-point rate hike at the June and July policy meetings as appropriate, but many believe that a sharp earlier hike would be a pause later in the year. leave room to assess the impact of policy tightening.

The dollar hit a one-month low and was set for a second straight weekly decline as traders lowered expectations for further rate hikes by the Federal Reserve. The U.S. dollar index fell 1.36% last week, its worst week since early February. As of press time, the U.S. dollar index fell 1.22% this week.

A broad slide in U.S. Treasury yields, weak economic data and cautious remarks from some Fed officials this week, including Atlanta Fed President Raphael Bostic, have led to expectations for a dollar rally from aggressive rate hikes May stop temporarily.

ING strategists said:

Preliminary speculation that the Fed will pause its tightening cycle in September is sure to help the dollar weaken.

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