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The U.S. dollar was on track to record its first weekly fall in 2024 on Friday, as investors took a breather after almost two months of rises built on subsiding expectations for future Federal Reserve rate cuts.
The greenback has bounced this year as strong economic data and warnings from Fed officials the inflation fight was not over supported expectations that rate cuts will be pushed out to June or later in the year.
Some analysts recently flagged that the dollar retracement in 2024 has been more significant than in U.S. yields, and further strength over the near term was limited.
"It's not the time yet to sell the dollar, but we think it will start to weaken in the second quarter, assuming that the Fed will cut in June and continue cutting rates once a quarter," Athanasios Vamvakidis, global head of G10 forex strategy at BofA Global Research, said.
BofA expects the euro to strengthen to 1.15 versus the greenback by the end of the year.
"If the U.S. economy remains so strong, we have to change our view, as the Fed might not be able to cut in June or not even this year," he added.
The dollar index =USD , which measures the U.S. currency against six others, dropped 0.03% to 103.89 and was set to record its first weekly fall, 0.38%, since the end of December.
Some analysts argued that increasing risk-appetite was the main reason behind this week's dollar correction as the U.S. currency is seen as a safe-haven asset.
Global
shares
capped a record-breaking week after U.S. chipmaker Nvidia's blockbuster earnings energised tech stocks.
"Once the Nvidia effect has faded, equity markets are left with increasingly stretched valuations as U.S. rates continue to rise," Francesco Pesole, forex strategist at ING, said.
Personal Consumption Expenditures (PCE), the Fed's favourite inflation gauge, due next week, "should be strong and push rate cut expectations further away," he added.
The euro rose 0.03% to 1.0826 EUR=EBS versus the greenback.
"The euro zone is slowly healing but is doing so without Germany, and the euro can't ignore Germany," said Kit Juckes, macro strategist at Societe Generale, referring to recent data showing Germany's economic downturn deepened in February.
German business
morale
improved in February, a survey showed on Friday, though probably not enough to prevent Europe's biggest economy from slipping into another recession.
"Norwegian crown and Swedish crown, or Polish zloty, are a better buy than the euro," he added.
The Swedish crown EURSEK= hit 11.1321 against the euro on Thursday, its highest level since Jan. 2. It was last down 0.13% at 11.161. The Norwegian crown EURNOK= was last down 0.2% to 11.385 against the single currency.
YEN WORST PERFORMER The yen is the worst-performing G10 currency this year, with a 6.3% slide on the dollar. The greenback is the best performer.
The Japanese currency headed for a fourth weekly drop as investors chased better yields just about everywhere else, wagering Japan's rates would stay near zero for some time.
For the week, the yen is down 0.8% on the euro, touching its weakest for three months on Thursday at 163.45 per euro EURJPY= . The dollar gained 0.21% versus the Japanese currency in the week to trade at 150.53 JPY=EBS .
Investors can earn interest, or "carry", by borrowing yen around 0% and buying income-bearing assets in other currencies.
"There's a focus on carry while we're in a range-bound environment," said Bank of Singapore strategist Moh Siong Sim, noting that hopes for a yen rally had taken a hit from last week's data showing an unexpected slide into recession in Japan.
With Deutsche Bank's foreign exchange volatility index .DBCVIX collapsing to two-year lows and markets backpedalling on bets for deep rate cuts in the U.S., Europe and Britain - leaving yields elevated - the trade is profitable.
"We believe the Bank of Japan (BoJ) will raise rates to zero and stop yield targeting in April. However, this should be already in the price," said BofA's Vamvakidis.
"For the dollar/yen to weaken, we need the Fed to start cutting rates," he added.
Elsewhere, the flow into higher-yielding currencies helped lift the Australian and New Zealand dollars.
China's yuan CNY=CFXS has made a steady return since the Lunar New Year holiday break. It barely moved this week at 7.2056 per dollar despite steep cuts to Chinese mortgage rates.
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