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US dollar drops, traders anticipate interest rate cut by May, according to Reuters.

The Dollar Falls as Traders Price in Rate Cut by May

The Dollar Weakens Against Euro and Yen

The dollar fell against the euro and yen on Thursday as investors continued to bet the Federal Reserve is closer to cutting interest rates, even after Chairman Jerome Powell said that a move in March was unlikely.

Powell’s Comments on Rate Cuts

Powell said on Wednesday that rates had peaked and would move lower in coming months, with inflation continuing to fall and an expectation of sustained job and economic growth.

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Market’s Reluctance

“The common theme that’s emerging from central bankers is a reluctance to indulge the market’s pricing on rate cuts,” said Adam Button, chief currency analyst at ForexLive in Toronto.

Probability of Rate Cut

Traders are now pricing in a 39% probability of a March rate cut, and a 94% chance of a rate reduction by May, according to the CME Group’s FedWatch Tool.

Jobs Report and Economic Outlook

Friday’s jobs report for January is expected to show that employers added 180,000 jobs during the month. Traders are expecting an economic slowdown, but they “haven’t gotten it yet”, said Joseph Trevisani, senior analyst at FX Street in New York.

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Impact on Treasury Yields and Regional Banks

The greenback has also been pulled lower by tumbling Treasury yields on renewed jitters over U.S. regional banks. A sell-off in shares of those banks continued on Thursday.

Bank of England’s Hawkish Tone

The Bank of England adopted a slightly more hawkish tone on Thursday, even as it dropped its warning that “further tightening” would be required if more persistent inflation pressure emerged.

Performance of Sterling and Euro

Sterling gained 0.46% on the day to $1.27455. The euro rose 0.5% to $1.08720, after earlier dropping to $1.07800, the lowest since Dec. 13.

Rate Decision from Sweden’s Riksbank

The other rate decision on Thursday was from Sweden’s Riksbank, which kept its key interest rate unchanged at 4.00% as expected. The bank said that if inflation continued to slow it might be able to bring forward the timing of a first rate cut, possibly even to the first half of 2024.

By Karen Brettell

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