Amanda Cooper
LONDON (Reuters) – The dollar remained steady on Monday as investors fueled the idea that U.S. inflation may have slowed enough for the Federal Reserve to cut rates in 2024, while the euro was calm ahead of an expected rate cuts by the European Central Bank. This week.
Among emerging market currencies, the Indian rupee and Mexican peso strengthened following general election exit polls in both countries. [EMRG/FRX]
The Indian rupee, Asia’s best-performing currency this year, last traded at 83.035 per dollar as exit polls pointed to a strong mandate and a rare third term for Prime Minister Narendra Modi.
The Mexican peso weakened on Monday after the ruling party declared Claudia Sheinbaum the winner of the presidential election by a “large margin” after polls closed on Sunday.
“This is a huge week for financial markets,” said Kathleen Brooks, director of research at trading platform XTB, citing the ECB’s rate decision and the Mexican election as factors.
In May, the dollar reported its first monthly fall this year, weighed down by changing expectations about when the U.S. central bank will cut rates and by how much, with markets pricing in a 37 basis point rate cut from the Fed this year.
Data on Friday showed consumer inflation rose modestly in April and price pressure remained above the central bank’s 2% target.
Traders estimate the likelihood of a rate cut in September to be around 60%, down from 49% before the report.
“If the Fed can cut rates because it can, not because it needs to prevent a recession, markets should do well,” said Brian Jacobsen, chief economist at Wealth Management App.
“The market will become impatient with the Fed’s patience as economic growth data shows the Fed is waiting too long to recalibrate rates.”
The index, which measures the U.S. currency against six other currencies, rose 0.1% to 104.67. The index fell 1.56% in May, but is up 3% for the year.
Investors’ attention this week will be on the ISM manufacturing report later in the day, as well as Friday’s employment data, to gauge the strength of the US labor market.
“If the unemployment rate does rise, it could be a sign that the US labor market is not as tight as some think, which could lead to further recalibration of interest rate expectations and even some dollar weakness as the weekend approaches.
Sterling fell 0.2% to $1.27215 while the euro was slightly lower at $1.0844 ahead of the ECB’s policy meeting on Thursday when the central bank is almost certain to cut rates.
Comments from ECB officials will be a focus for traders along with economic forecasts as they assess whether the central bank will make further cuts after Thursday following data showing euro zone inflation rose in May.
Markets expect the ECB to cut rates by 57 basis points this year.
S&P on Friday downgraded France’s sovereign credit rating by one notch to ‘AA-‘, citing expectations that higher-than-expected deficits will lead to higher debt in the euro zone’s second-largest economy.
Meanwhile, data released Friday showed Japan’s monetary authorities spent 9.79 trillion yen ($62.23 billion) on foreign exchange market interventions to support the yen over the past month.
The yen is by far the worst performing major currency against the dollar this year, losing 10%.
The yen was little changed against the dollar on Monday at 157.18, close to last week’s four-week low of 157.715.