Australian dollar falls as upbeat US data dents rate cut hopes

There are also fears that the world’s largest economy will continue to accelerate and inflation could stall its downward march, derailing the Fed’s incoming easing policy.

US Treasury yields jumped between 9 and 14 basis points. The two-year return, which reflects interest rate expectations, climbed to 4.71 per cent and the 10-year jumped to 4.32 per cent.

Fading optimism

“Markets have spent most of March well bid as there seems to be some optimism that rate cuts are coming,” said Tim Hext, head of government bond strategies at Pendal. “So the minute you get data or Fed officials suggesting otherwise, markets back off.”

Fed futures funds pared back bets of a June interest rate cut to 62 per cent, from 86 per cent last week. They remain fully priced for the first easing in July but have reduced the magnitude of rate cuts this year to 67 basis points from 85 basis points last week. This would be equivalent to two moves, lower than the Fed’s own projections of three reductions.

The sharp US reaction filtered through global bond markets with Australian bond futures pushing back the timing of the first rate cut by the Reserve Bank to November from September. Markets have been toying for the past weeks between a September and November timing and imply a 61 per cent chance of a move in August, from 72 per cent last week.

Mr Hext said he expected to see a much more shallow Fed easing cycle as the economy appeared “healthy”.

Even so, the fund manager stressed that the Fed was not cutting rates because of weak economic growth – “they will be cutting rates because of inflation”.

Last week the US personal consumption expenditure price index, an inflation measure closely watched by the Fed, climbed 0.3 per cent in February, against forecasts of 0.4 per cent.

Fed chairman Jerome Powell later commented that the central bank needed “more good inflation data, similar to last year” and that they “don’t need to hurry to cut”.

Elsewhere in the world, traders are on guard for a possible currency intervention by the Bank of Japan after the yen dropped to its lowest in 34 years last week. The yen hovered just below 152 per dollar, having fallen as far as 151,975 on Wednesday.

Japanese authorities held an emergency meeting last week to discuss the yen slide and Finance Minister Shunichi Suzuki said on Monday that he would not rule out options against excessive currency movement.

The Bank of Japan last intervened in late 2022 when the yen skidded towards 152 per dollar.