The dollar started the week on a pessimistic note as traders priced in a tightening of policy divergence between the US Federal Reserve and other major central banks.
An index measuring the greenback against six peers slid 0.8% in morning European trading, while the euro rose 1.5% to trade above parity with the currency US at $1,019. The pound also climbed, adding 0.9% to just under $1.17.
The euro has fallen by around a tenth this year, while the US currency has risen around 13% – the latter propelled higher by aggressive interest rate hikes and hawkish messages from the Fed on the future course of monetary policy.
But Monday’s moves in currency markets came days after the European Central Bank raised borrowing costs by 0.75 percentage points to 0.75%, and signaled further increases to come – signaling a more assertive approach to tackling inflation in the common currency region.
The dollar’s decline also preceded a new U.S. inflation report, due Tuesday, which investors will be watching closely for clues about the future path of rate hikes in the world’s largest economy. Analysts polled by Reuters expect August’s consumer price index to register an 8.1% year-on-year reading, down from 8.5% in July.
A lower-than-expected CPI, helped in part by falling US oil prices, could further weaken investor sentiment toward the greenback. In comparison, Europe remains in the grip of an energy crisis, fueling inflationary pressures.
In the United States “according to our forecasts, inflation has peaked and . . . lower oil prices support further declines going forward,” the SEB analysts wrote. 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 safe haven status in times of economic crisis.
“We have a lot of traditional investors hiding in dollar assets; the stronger it gets, the more they hide,” said Mark Tinker, chief investment officer at Toscafund. “That means there are a lot of people who are worried about the rotation of the dollar.”
Markets are pricing in the likelihood of an interest rate hike of 0.75 percentage points at the Fed’s next monetary policy meeting in late September, which would mark the third consecutive hike of such magnitude. The central bank’s current target range is between 2.25% and 2.50%.
Fed Governor Christopher Waller on Friday backed “another significant increase” in interest rates this month, speaking on the last day central bank officials can make public remarks ahead of the next meeting. Politics.
In equity markets, the regional Stoxx 600 gained 0.9% in morning trading, Germany’s Dax index rose 1.6% and the FTSE 100 added 1.3%, extending the session’s gains. former.
Japan’s Topix rose 0.7%. 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