Chuck Mikołajczak
NEW YORK (Reuters) – The dollar strengthened after falling in the previous session while the euro lost ground on Monday as market moves were dictated by recent global central bank meetings that set expectations for divergent interest rate cut paths next year.
The U.S. currency, which measures the U.S. currency against six of its biggest peers, is back on an upward trajectory after suffering its biggest one-day decline in nearly a month on Friday following a softer-than-expected inflation reading but still above the Federal Reserve’s 2% target rate . The dollar is currently on track for a fourth gain in five sessions.
Last week, the Fed predicted a more measured pace of rate cuts than markets expected, sending both the dollar and the U.S. Treasury soaring.
“The key for the dollar right now is the policy divergence, and Powell’s shift from being more concerned about unemployment than inflation and then returning to the labor market is fine, but we are more concerned about the inflation stance that confuses the market,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
“To reverse the dollar, I will be looking for the market to overtake the Fed on the dovish side again, and we need weak economic data, and employment data would be a step in that direction.”
The dollar index rose 0.37% to 108.19, staying near two-year highs, while the euro fell 0.34% to $1.0394.
Investor sentiment was also supported by the adoption by the US Congress of spending legislation on Saturday that helped avoid a government shutdown.
Economic data from the Commerce Department showed modern orders for key U.S.-made capital goods rose in November, partly due to robust demand for machinery, another sign that the economy is entering the modern year on solid footing.
However, the Conference Board said its consumer confidence index fell to 104.7 this month from an upwardly revised 112.8 in November as enthusiasm for the U.S. election waned and concerns emerged about future business conditions.
Traders are pricing in 33 basis points of interest rate cuts next year, just shy of the two 25 basis point rate cuts the Fed projected last week. According to CME’s FedWatch Tool, the market is pricing in no more than a 50% chance of the Fed cutting interest rates by its May meeting.
According to an interview published on Monday in the Financial Times, the president of the European Central Bank, Christine Lagarde, said that the euro zone is very close to achieving the medium-term inflation target set by the ECB.
In early December, Lagarde said the central bank would make further interest rate cuts if inflation continued to fall to its 2% target, as curbing growth would no longer be necessary.
As we approach the end of the year, trading volumes are likely to be lightweight during the holiday-shortened trading week.
Against the Japanese yen, the dollar strengthened by 0.46% to 157.13. The dollar’s rise, combined with the Bank of Japan’s interest rates holding steady and Governor Kazuo Ueda’s comments reducing the chances of an interest rate hike in Japan next month, has pushed the yen back to near delicate levels, prompting Japanese authorities recently to intervention.
The pound sterling weakened 0.37% to $1.2523. The Bank of England left interest rates unchanged on Thursday, although the vote was more divided than expected.
