Is the dollar’s sharp decline signaling a shift in Fed rate expectations?

“The dollar fell to a 10-week low against a basket of currencies on Monday, reflecting doubts over whether the Federal Reserve will raise interest rates this year.

Recent U.S. data, including weak jobs and retail sales figures along with subdued inflation prints, have prompted markets to further trim bets on U.S. rate rises.

The DXY dollar index fell to 99.294, its lowest level since early June, in early European trade. The euro rose to a two-month high of $1.1614 and sterling hit a three-month high of $1.3571, according to LSEG data, as interest-rate expectations shifted in their favor.

U.S. rate-rise expectations have been steadily scaled back since the Fed’s last meeting in July when Chair Kevin Warsh refrained from providing forward guidance, putting the emphasis on data, Commerzbank currency analyst Volkmar Baur said in a note.

Should markets further pare rate-rise bets, in line with Commerzbank’s expectations for three rate cuts next year, the dollar could face further losses, he said.

U.S. money market pricing Monday showed a 31% chance of a 25 basis-point rate increase at the September 16 meeting, compared to odds above 50% before the worse-than-expected U.S. nonfarm payrolls report on August 7, LSEG data showed. A rate rise is no longer a done deal this year with just 21 basis points of rate rises priced in by December.

In contrast, eurozone money-market pricing implied an 84% chance of the European Central Bank lifting rates again in September, with 38 basis points of rate increases priced in by December. U.K. money markets were fully pricing in a 25 basis-point rate hike from the Bank of England by December.

The market will be scouring the minutes of the Fed’s July meeting on Wednesday for any clues on the trajectory of rates. The Fed held rates at 3.5-3.75% for the fifth consecutive time in July, although three officials preferred a rate increase.

“Fed Chair Kevin Warsh wanted market participants to make up their mind about how the Fed should react to changing economic conditions rather be guided by forward guidance, and they are currently sending a clear signal that there is less need for the Fed to hike rates,” MUFG Bank analysts Lee Hardman and Derek Halpenny said in a note.

Given slightly weak activity data since the July meeting, it will be hard for the market to feel fully confident again that rates will be raised, even if the minutes point to a closer call on the unchanged rates decision than most think, ING analyst Chris Turner said in a note.”