The dollar kicked off the week on a downbeat note as traders priced in a narrowing of policy divergence between the US Federal Reserve and other big central banks.
An index measuring the greenback against six peers slid 0.8 per cent in European morning dealings, while the euro rose 1.5 per cent to trade above parity with the US currency at $1.019. The pound also climbed, adding 0.9 per cent to just below $1.17.
The euro has fallen by about a tenth this year, while the US currency is up roughly 13 per cent — with the latter propelled higher by aggressive interest rate rises and hawkish messaging from the Fed about the future path of monetary policy.
But Monday’s moves in currency markets came days after the European Central Bank lifted borrowing costs 0.75 percentage points to 0.75 per cent, and pointed to more increases to come — signalling a more assertive approach to tackling inflation in the common currency region.
The dollar’s decline also preceded a fresh US inflation report, due on Tuesday, which investors will scrutinise closely for clues about the future path of rate rises in the world’s largest economy. Analysts polled by Reuters expect August’s consumer price index to register a reading of 8.1 per cent year on year, down from 8.5 per cent in July.
A lower than forecast CPI figure, helped in part by falling petrol prices in the US, could further weaken investor sentiment towards the greenback. By comparison, Europe remains in the grip of an energy crisis, stoking inflationary pressures.
In the US “according to our forecast, inflation has peaked and . . . lower oil prices provide support for further falls going forward,” wrote analysts at SEB. They added that the pace of price growth could diverge between the US and Europe this week, when UK CPI figures are also due.
Many investors have turned to the dollar for its traditional haven status during times of economic stress.
“We have a lot of traditional investors hiding in dollar assets; the stronger it becomes, the more they hide,” said Mark Tinker, chief investment officer at Toscafund. “That means there are a lot of people who are nervous about the dollar turning”.
Markets are pricing in the probability of a 0.75 percentage point interest rate rise at the Fed’s next monetary policy meeting in late September, which would mark the third consecutive increase of such magnitude. The central bank’s current target range stands at 2.25 per cent to 2.50 per cent.
Fed governor Christopher Waller on Friday backed “another significant increase” in interest rates this month, speaking on the final day that the central bank’s officials can make public remarks before the upcoming policy meeting.
In stock markets, the regional Stoxx 600 gained 0.9 per cent in morning trades, Germany’s Dax index rose 1.6 per cent and the FTSE 100 added 1.3 per cent, extending gains from the previous session.
Japan’s Topix rose 0.7 per cent. Markets in Shanghai, Shenzhen, Hong Kong and South Korea were closed for the Mid-Autumn Festival holiday.
Additional reporting by Hudson Lockett in Hong Kong
