Tom Westbrook
SINGAPORE (Reuters) – The dollar got off to a strong start to the week on Monday as investors focused on inflation data from the United States, Europe and Japan that informed the outlook for global interest rates.
Foreign exchange trading has been dominated by carry hunting in recent months, punishing low-rate currencies and supporting the dollar, while US data has gone hot and cold and dented policymakers’ confidence in the rate outlook.
Several major pairs maintained tight ranges. The euro, which gained 0.9% against the dollar last week, was in the middle of a range it had held for more than a year at $1.0846.
Trading on Monday was weakened by holidays in the UK and US.
German inflation on Wednesday and eurozone figures on Friday will watch for confirmation of the rate cuts in Europe that traders have planned for next week.
Sterling was testing the top end of the range it had held this year at $1.2735. The Australian and New Zealand dollar retreated from recent highs to remain at $0.6637 and $0.6122 as markets lowered expectations of a US interest rate cut.
Friday’s readings of the core personal consumption price index, the Federal Reserve’s preferred measure of inflation, were expected to be stable on a monthly basis.
The dollar fell back after data showed a slowdown in consumer price growth in April, and confirmation of this trend could lead to further declines in the dollar, but the overall picture is that inflation and inflation indicators remain above the Fed’s 2% target.
“Reaching the 2% inflation target appears further away than at the end of last year, and some softer inflation targets are needed to restore confidence,” analysts at Societe Generale (OTC:) said.
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While uncertainty over interest rates remains, investors are chasing yield and selling low-yielding currencies such as the yen, yuan and Swiss franc for the euro and dollar.
The Swiss franc has fallen all year and stood at 0.9928 francs per euro last week, its lowest level since April 2023. ended last week below 7.24 per dollar, its lowest level since early May.
The yen may post its first monthly gain this month thanks to expected intervention by Japanese authorities in late April and early May, but it has weakened since then.
It held steady at 156.87 per dollar on Monday, but received little support from rising Japanese government bond yields – with 10-year maturities, for example, they remain nearly 350 basis points below U.S. bond yields.
The Tokyo Consumer Price Index, due out on Friday, is a reliable guide to the national trend and will be closely watched. Treasury data on Friday will also show the size of Japan’s intervention.
The US decision to cut stock market settlement from two days to one is another factor to watch in FX trading this week as dealers expect it could lead to quiet early mornings in Asia.
“Asian investors will have just a few hours to aggregate funding requirements, process trade-related foreign exchange instructions and manage execution,” said Lloyd Rees, global head of custodial product for Asia and the Middle East at BNY Mellon (NYSE:).
In cryptocurrency markets, ether capped its biggest weekly gain in nearly three years following the surprise approval of some applications for US exchange-traded funds (ETFs).
Additional approvals are needed before launch, but the second-largest cryptocurrency by market value rose 25% against the dollar last week and another 5% to $3,938 in Asian trading on Monday.
“A month ago, many people would have rated the likelihood of an ETH ETF in the future as low to distant,” said Justin D’Anetan, head of partnerships at digital asset maker Keyrock.