Dollar Enters Water as Markets Reassess Bets; ECB viewed

US dollar banknotes are shown in this image, taken Feb. 14, 2022. REUTERS/Dado Ruvic

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LONDON, June 27 (Reuters) – The US dollar struggled against its major rivals on Monday as declining inflation expectations prompted a reassessment of the outlook for aggressive rate hikes, but volatile markets dampened a broader decline.

Aggressive rate hikes have boosted the dollar with an index soaring to a nearly two-decade high of 105.79 earlier this month. But with a number of high-frequency data indicators showing economic momentum beginning to cool and a broader decline in commodity prices, investors are becoming more cautious. (.CESIUSD)

“The dollar index is trading towards the low end of its recent trading range, indicating some vulnerability to further weakness,” said Shaun Osborne, an analyst at Scotiabank.

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“We think the dollar’s broader rally will struggle to expand significantly, but losses are likely to be contained unless or until a more significant bearish catalyst emerges.”

Against its rivals, the dollar fell 0.2% to 103.86. Earlier this month, it reached 105.79, the highest level since late 2002.

While concerns about a slowdown in growth weighed on sentiment, lower inflation expectations, mainly due to falling commodity prices, have also eased pressure for higher rates.

Copper, for example, is on track for its biggest monthly decline since the pandemic-driven sell-off in March 2020. Oil prices will see a monthly decline for the first time this year.

Falling commodity prices have weighed on expectations of where US interest rates will peak next year. Higher end prices of benchmark rates have been important support for the dollar, but that source of strength has faded in recent days.

Futures pricing shows that traders are now anticipating a stabilization in the US Federal Reserve’s benchmark interest rate at around 3.5% from March next year, a drop in rate pricing to around 4% by 2023.

“In general, the markets have priced lower and earlier Fed interest rates, taking some of the dollar’s appeal away from the yield differential,” said Simon Harvey, head of FX analysis at Monex Europe.

The euro led the gains against the dollar as the European Central Bank’s annual forum kicked off in Sintra with ECB President Christine Lagarde and Federal Reserve Chair Jerome Powell both attending the meeting. Markets will watch for signs of future policy moves.

The euro is up 0.2% to $1,0580.

Commodity currencies came under pressure on Monday after data showed that profits of Chinese industrial companies shrank again in May, albeit at a slower pace, after falling sharply in April. read more

Elsewhere, the Russian ruble weakened in the interbank market as Russia headed for its first sovereign default since the Bolshevik revolution a century ago. read more

Cryptocurrencies solidified gains, with the world’s largest cryptocurrency Bitcoin up 1.4%, trading at $21,170.88 after falling to $17,588.88 earlier this month.

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Reporting by Saikat Chatterjee; Editing by Muralikumar Anantharaman and Jane Merriman

Our Standards: The Thomson Reuters Trust Principles.

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