Authors: Tom Westbrook and Alun John
SINGAPORE/LONDON (Reuters) – The euro strengthened on Monday after German inflation data, while commodity currencies rose on hopes of a recovery in the Chinese economy and the Japanese yen strengthened on the modern prime minister’s call for early elections.
The dollar, which has been hovering near a one-year low against a basket of other currencies, will be shaped by Friday’s non-farm payrolls data, which will provide the latest information on the health of the US economy and the scale of necessary interest rate cuts over the next few months.
Expectations for significant US monetary easing this year, which the Federal Reserve met with its recent 50 basis point interest rate cut, have resulted in the dollar weakening against most major currencies in recent weeks.
The euro touched $1.1194, up 0.25% on the day and slightly strengthening after German government data suggested domestic inflation was falling, although not as significantly as data from France and Spain last week .
The currency was steady at 83.43p against the pound on the day, but remained at a two-year low.
Price data in France and Spain, combined with recent signs of feeble economic growth, led several major investment banks to change their European Central Bank calls last week, including an October interest rate cut as well as a widely anticipated December decision.
This meant the single European currency weakened against most other countries and held steady against the US dollar, despite Chinese stimulus measures for the economy, which would normally be positive for the euro given the currency bloc’s ties to Beijing.
“Last week’s inflation data gives the ECB justification to carry out further interest rate cuts in October and December, which certainly helps to weaken the advantage of the euro against the dollar resulting from China’s optimism that appears on the market,” he said. Lee Hardman, Senior Currency Analyst, MUFG.
Australian and New Zealand dollars hit highs in 2024 as interest rate cuts and expectations of fiscal support in China raised hopes of an improvement in the slowing economy and supported gains in Chinese markets and anything exposed to China’s growth.
The Australian dollar hit a 20-month high of $0.6941 and the New Zealand dollar rose to $0.6375, a 14-and-a-half-month high. [AUD/]
Both units gained on European currencies, with the euro falling as low as 1.6082 Australian dollars, its lowest level since mid-July.
The Japanese yen was also in the spotlight as Shigeru Ishiba – a former defense minister and former critic of aggressively straightforward policies – who won the leadership of the ruling Liberal Democratic Party last week, said he would call a general election on October 27.
The yen rose on Friday to a one-week high of 141.65 per dollar in Asian hours, but further moves were circumscribed as Ishiba told public broadcaster NHK that from the government’s perspective, policy must remain accommodative as a trend given economic conditions .
The dollar was last up 0.17% at 142.45 yen.
Analysts said that would be enough to stop the yen from soaring after his victory and that early elections could have an impact on the yen at least in the miniature term.
“The election essentially takes the Bank of Japan out of the equation until December…marginal negative yen,” said Ray Attrill, head of currency strategy at National Australia Bank (OTC:).
A raft of stimulus measures by Beijing boosted growth last week despite interest rate cuts as investors flocked to Chinese stocks, which had their best week in a decade. On Friday, the yuan crossed the psychological mark of 7 per dollar in foreign trade, although it fluctuated at 7.0115 in onshore trade on Monday. [CNY/]
The pound sterling is out of the drama, up 0.2% against the dollar at $1.3402, and the Swiss franc weakened, with the euro up 0.7% at 0.9441 francs and the dollar up 0.4 % higher to 0.8437.
