On Monday, the U.S. dollar held its ground, though it is poised for its first monthly loss this year. Investors are closely watching inflation data from the U.S., Europe, and Japan to gauge future interest rate decisions globally.
Market Dynamics and Currency Performance
Recent months have seen foreign exchange trading dominated by the search for higher yields, favoring the dollar while penalizing low-yield currencies. Mixed U.S. economic data has further complicated policymakers’ confidence in the rates outlook. Major currency pairs have remained within tight ranges, with the euro trading at $1.0845, close to the middle of a range it has maintained for over a year.
The euro showed little reaction to a survey indicating worsening German business confidence in May, contrary to forecasts of an improvement. Monday’s trading volume was light due to holidays in Britain and the United States. Investors will closely watch German inflation data on Wednesday and eurozone readings on Friday for signs of a potential European Central Bank rate cut expected next week.
ECB chief economist Philip Lane mentioned that the pace of rate cuts will hinge on the strength of underlying inflation.
Sterling tested the upper end of its range this year, trading at $1.2745. Meanwhile, Friday’s U.S. core personal consumption expenditures (PCE) price index data, the Federal Reserve’s preferred inflation measure, is expected to show steady month-on-month results. A continued slowdown in consumer price rises could further pressure the dollar, although overall inflation remains above the Fed’s 2% target.
The dollar index, which tracks the U.S. currency against six others, was down slightly at 104.72, set for a 1.5% drop in May, the largest since December. Pepperstone strategist Chris Weston noted, “A 25-basis point U.S. interest rate cut in September is seen as a 50/50 chance, with 57 basis points of cuts anticipated by December. A significant surprise in U.S. core PCE could shift this expectation.”
Carry Trade and Currency Interventions
With ongoing rate uncertainty, investors have pursued higher yields, selling low-yield currencies like the yen, yuan, and Swiss franc against the euro and dollar. Despite suspected intervention from Japanese authorities in late April and early May, the yen has slipped back, trading steadily at 156.86 to the dollar on Monday.
Tokyo CPI data, due on Friday, will be closely watched as it provides a reliable guide to national trends. Finance ministry data on the same day will also reveal the extent of Japan’s intervention.
Market Settlements and Cryptocurrencies
The U.S. move to shorten equity-market settlement from two days to one is another factor influencing currency trade this week, potentially driving more activity into the early mornings in Asia. “Asia-based investors will only have a few hours to aggregate funding requirements, process trade-related FX instructions, and manage execution,” said Lloyd Rees, global custody product lead for Asia and the Middle East at BNY Mellon.
In the cryptocurrency markets, ether marked its largest weekly rise in nearly three years following the unexpected approval of some U.S. exchange-traded fund (ETF) applications. Although further approvals are needed, ether’s price surged 25% against the dollar last week and gained an additional 5% to reach $3,938 in Asian trading on Monday.
Leave feedback about this