Treasury yields perk up and help boost the US dollar

It's a relatively quiet start to the session with not much for traders and investors to work with. The overall risk mood remains more muted, even if European indices are posting modest gains to follow up the steady showing from yesterday. US futures are flat, so that's not providing much direction on risk appetite.

As such, major currencies are mostly caught in a bind with the dollar at least keeping steadier after a softer showing to start December. The only notable mover on the day is USD/JPY, which is just down 0.2% but starting to trickle below the 155.00 mark as mentioned earlier here.

Besides that, there is not much appetite across other major currencies with EUR/USD locked in by large option expiries while other major currencies are keeping only within 15 pips change of the dollar currently.

At the balance, the dollar is still keeping more vulnerable on the week but the slow bleeding has at least stopped for now.

The key risk events later in the day will be from US data with the Challenger job cuts and weekly initial jobless claims on the agenda. As a reminder, there will be no non-farm payrolls report this week. This article was written by Justin Low at investinglive.com.

Fitch Ratings expects the downside in the Indian rupee to be limited, projecting the currency to strengthen to 87 per dollar in the coming year. In its global economic outlook released on December 4, the agency said the rupee may settle at 87 by end-2026, compared with its earlier forecast of 88.5 for end-2025. Fitch sees the currency holding at similar levels through 2027.

The projection comes a day after the rupee hit a record low of 90.29 per dollar before closing at 90.19. The currency slipped further in early trade on December 4, touching 90.4 against the greenback.

Reserve Bank of India data suggests the rupee is undervalued. In October, when the currency traded near 89, the 40-currency Real Effective Exchange Rate (REER) stood at 97.47, marking the longest undervaluation stretch in eight years. Low domestic inflation has been a key contributor to the REER reading, alongside the rupee’s spot depreciation.

“Domestic inflation is very low currently, and that is a contributory factor to the REER falling below 100,” Dhiraj Nim, economist and forex strategist at ANZ, told Moneycontrol, adding that the trend may reverse once inflation edges up from April. He noted that India typically grows faster than its trading partners, and a REER of 102–103 would indicate a fairly valued currency. The current undervaluation, he said, supports export competitiveness.

Stronger growth, muted inflation to persist

Fitch has also raised India’s FY26 growth forecast to 7.4 percent from 6.9 percent, citing robust private consumption supported by GST and income-tax reforms. The upgrade follows India’s 8.2 percent GDP expansion in the second quarter—the strongest in six quarters.

Growth is expected to moderate to 6.4 percent in FY27 and 6.2 percent in FY28. Inflation, meanwhile, is projected to remain subdued at 1.5 percent this fiscal before rising to 4.4 percent next year.

With inflation falling sharply, Fitch said the Reserve Bank of India may have room for one more rate cut in December, taking the repo rate to 5.25 percent. This follows 100 basis points of cuts in 2025 and a reduction in the cash reserve ratio from 4 percent to 3 percent. The agency expects the RBI to hold rates steady for the next two years as core inflation begins to firm and growth remains solid.

The RBI’s Monetary Policy Committee will announce its rate decision on December 5. Economists say the rupee’s steep fall has complicated the policy outlook, with the MPC likely to weigh the interest-rate differential with the US Federal Reserve before deciding on further easing.

There are quite a number to take note of on the board for the day, as highlighted in bold below.

The big ones are for EUR/USD layered across 1.1600 through to the 1.1700 mark, with larger ones centered around the 1.1650 level. That should at least keep price action more concentrated in the current range, with a weaker dollar in general across also helping to keep the pair underpinned this week.

But with the larger expiries, that could limit price movements in the session ahead at least - before the expiries roll off later in the day.

As for USD/JPY, there is one at the 155.70 level. That ties close to the 100-hour moving average of 155.67 currently, so that could help to limit any upside extensions in the session ahead. However, the pair continues to look a little heavier since yesterday amid a softer dollar and the continually reinvigorated expectations of a BOJ rate hike this month. The latest on that from here.

For more information on how to use this data, you may refer to this post here.

Head on over to investingLive (formerly ForexLive) to get in on the know! This article was written by Justin Low at investinglive.com.

The U.S. dollar was soft on Thursday after lacklustre economic data cemented the case for a rate cut from the Federal Reserve next week, providing relief to the yen and pushing the euro to its highest level in nearly seven weeks.

Investors have also been weighing the prospect of White House economic adviser Kevin Hassett taking over as Fed Chair after Jerome Powell’s term ends in May. He is expected to push for more rate cuts.

U.S. President Donald Trump said this week he will unveil his pick to succeed Powell early next year, extending a months-long selection process despite previously claiming he had already decided on a candidate.

A move to appoint Hassett could pressure the dollar, analysts have said, with bond investors expressing concerns to the U.S. Treasury that Hassett could aggressively cut rates to align with Trump's preferences, the Financial Times reported.

Traders are pricing in an 89% chance of a quarter-point rate cut next week, CME FedWatch showed, with an expected 89 basis points of easing by the end of next year. Analysts are sceptical about how long and deep the easing cycle would be.

Thomas Mathews, head of markets for the Asia-Pacific region at Capital Economics, said given the strength of the U.S. economy, investors may be overestimating how far the Fed will cut in the medium-term, regardless of what it does next week.

"That, I think, will keep the dollar from falling too far," he said.

Still, the dollar index, which measures the U.S. currency against six rivals, was at 98.919, languishing near a five-week low. The index is down nearly 9% for the year.

Thierry Wizman, global FX & rates strategist at Macquarie, said the sudden realization of better data abroad, wage growth signals in Japan, combined with the prospect that the next Fed chair will be Hassett, has probably helped push other currencies higher as the dollar has slid.

The euro was steady at $1.1674 in Asian hours after breaching the highest level since October 17 in the previous session as data showed business activity in the euro zone expanded at its fastest pace in 30 months in November.

The currency is up over 12% this year, on pace for its biggest annual gain since 2017, benefiting from a weak dollar due to tariff uncertainties earlier in the year and lately rising odds of U.S. rate cuts.

The European Central Bank is due to meet in two weeks and is broadly expected to stand pat on rates, with markets pricing in only a one-in-four chance of any easing next year.

The yen was little changed at 155.18 per U.S. dollar as worries of intervention by Tokyo authorities eased slightly, even though Japanese bonds have sold off this week on fiscal worries over a massive spending plan from Prime Minister Sanae Takaichi.

Markets are now expecting the Bank of Japan to raise rates in two weeks after hints from BOJ Governor Kazuo Ueda helped ease some of the pressure on the yen.

Sterling was at $1.33425, hovering near its highest point since October 28. The Australian dollar last fetched $0.66075, while the New Zealand dollar was at $0.5774. Both were trading near their highest levels in more than a month.

The recent slide in the rupee is expected to have only a marginal impact on inflation, according to Ranen Banerjee, partner and leader of Economic Advisory Services at PwC. He estimated that the currency’s depreciation would add no more than 10–20 basis points to overall price levels.

The rupee briefly slipped past the 90-mark on December 2, touching a record low of 90.19 against the US dollar.

Banerjee said that while a weaker rupee typically raises the cost of imported goods, its pass-through to consumer inflation is now more limited because a large share of India’s imports is re-exported. Crude oil, primary commodities and gold make up a substantial portion of the import basket and are largely processed or used in export-oriented sectors, he noted. “There will be an inflationary impact, but given our export and import basket has changed, it is not going to be that high,” he added.

He also cautioned against viewing currency movements in binary terms, arguing that exchange-rate shifts should be assessed for their broader macroeconomic implications rather than as indicators of economic strength or weakness.

On monetary policy, Banerjee said the Reserve Bank of India’s Monetary Policy Committee has “headroom” to cut rates, though timing remains a matter of deliberation. “There is no trigger if inflation is benign and growth is high,” he said.

A key uncertainty, however, is the path of the US Federal Reserve. If India holds rates steady while the Fed eases, the narrowing yield differential could raise the risk of capital outflows.

Banerjee downplayed concerns that a weaker rupee would strain public finances. He said even a modest rise in the fertiliser subsidy bill would not materially alter the fiscal math. The Centre, he added, is likely to meet its fiscal deficit target for the year and could even outperform expectations with a deficit around 4.3 percent of GDP.

Looking ahead, he expects the deficit to fall below 4 percent next year as the government works toward reducing the debt-to-GDP ratio to about 50 percent.

“We expect the capital spending to touch Rs 12 lakh crore in FY27, while fiscal deficit will have a possibility to even drop below 4 percent of GDP mark given the government is targeting to bring the debt to GDP ratio towards 50 percent,” he said.

India’s fiscal deficit is projected at Rs 10.7–11.1 lakh crore this year, compared with the budgeted target of Rs 11.2 lakh crore. As of October, the government had already spent more than half of the annual allocation.

The euro climbed above $1.165, reaching its strongest level since mid-October, supported by an upward revision to November’s Eurozone composite PMI and diverging monetary policy expectations between the ECB and the Fed.

The HCOB Eurozone Composite PMI rose to 52.8, exceeding the preliminary estimate of 52.4, marking the strongest expansion in private-sector activity since May 2023, driven largely by renewed momentum in the services sector.

Earlier this week, Eurozone inflation edged up to 2.2% in November from 2.1% in October, slightly above market forecasts.

The combination of resilient economic activity and inflation near target suggests the European Central Bank is likely to hold interest rates steady through 2026.

In contrast, the Federal Reserve is expected to cut rates by 25 basis points this month, with two further reductions projected for next year, supporting the euro’s advance against the dollar.