Dollar Edges Lower From 6-Week Peak, Eyes on Fed

LONDON—The dollar edged lower on Monday but remained close to Friday’s six-week high, as a recent flurry of positive economic data reinforced market expectations of tighter monetary policy from the Federal Reserve.

The U.S. Dollar index, which measures it against six major currencies, fell 0.14 percent at 103.83. However, it was up almost 1.8% for the month. It is on track to make its first monthly gain since September last year. It reached a six-week peak of 104.67 Friday.

Expect liquidity to be very low on Monday as the U.S. markets are closed for Presidents’ Day.

Recent data from the largest economy in the world has shown that there is still a tight labor market. Strong retail sales, high consumer prices and higher producer prices have all raised concerns that the U.S. central banking will have more work to do to control inflation.

Analysts believe that the Fed funds rate will peak at just under 5.35% by July. Markets now expect this, so the dollar’s move may be over.

“The dollar has had quite a big move this month on the back of rates repricing and the question is how much further that’s going to run,” Chris Turner Global Head of Markets at ING.

“I’d say the majority of what we’re calling a ‘corrective rally’ in the dollar has been seen,” Turner added.

Fed officials’ hawkish remarks have also supported the U.S. Dollar, signaling that interest rates will need to rise to stop inflation.

Similarly, European Central Bank (ECB), two policymakers, stated on Friday that interest rate in the eurozone is still likely to rise. This will increase market prices for the peak ECB rates.

The euro was at its lowest point since Friday, $1.0694. This is just below Friday’s 6-week low of $1.06125.

“We think the U.S. disinflation process will have another leg in the second quarter, while in Europe, inflation is likely to be stickier,” Turner, a spokesperson for ING.

“Euro rates are probably likely to stay at higher levels, whereas we think dollar rates will more easily turn lower,” Turner said that the euro could be supported in the first half year.

The dollar was at 134.18 against the yen, which was flat. On Friday, it reached a two-month peak of 135.12 Japanese yen.

The Australian dollar rose 0.4% to $0.6909 in response to the minutes of Tuesday’s policy meeting of the Reserve Bank of Australia.

The kiwi dropped 0.2% to $0.6231 ahead of Wednesday’s rate decision by the Reserve Bank of New Zealand (RBNZ).

RBNZ is likely to moderate its tightening campaign slightly with a half-point increase in interest rates to 4.75 percent.

“With inflation so high … not staying the course could mean even higher interest rates are required down the track,” Analysts from ANZ said so.

China maintained its benchmark lending rate for February at the same level as usual. Asia’s second largest economy is showing more signs of recovery following a pandemic.

The offshore Yuan was last slightly higher at 6.8643 dollars, while the onshore Yuan last purchased 6.8580 dollars.

Rae Wee and Samuel Indyk