NEW YORK :The dollar rebounded while the euro dipped on Monday, as market moves were being dictated by recent global central bank meetings that set expectations for diverging rate cut paths next year.
The dollar index, which measures the U.S. currency against six of its largest peers, resumed its upward trajectory. It suffered on Friday its biggest one-day drop in nearly a month following a softer-than-expected reading on inflation that was still above the Federal Reserve’s 2 per cent target rate.
The greenback is on track for its fourth gain in five sessions, during which it has gained 1.2 per cent.
The Fed last week projected a more measured pace of rate cuts than markets had been anticipating, pushing both the dollar and U.S. Treasury yields sharply higher.
“The key for the dollar right now is the policy divergence, and (Fed Chair Jerome) Powell going from more worried about unemployment than inflation, and then the flip-flop back to ‘the jobs market is OK, but we are more worried about inflation’ kind of attitude confuses the market,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
Chandler does not expect the dollar to begin to weaken until the market becomes more dovish than the Fed again, and said a soft jobs report in early January would be a start.
The dollar index, rose 0.24 per cent to 108.05, holding near two-year highs, with the euro down 0.2 per cent at $1.0408.
Also supporting investor sentiment was the passage of spending legislation by the U.S. Congress on Saturday, which sidestepped a government shutdown.
Economic data from the Commerce Department showed new orders for key U.S.-manufactured capital goods surged in November due in part to strong demand for machinery in another sign the economy remains on firm ground heading into the new year.
However, the Conference Board said its consumer confidence index dropped to 104.7 this month from an upwardly revised 112.8 in November, as enthusiasm over the U.S. election faded and concerns about future business conditions emerged.
Traders are pricing in 33 basis points of rate cuts next year, shy of the two 25-bps rate cuts the Fed projected last week. The market is not pricing in more than a 50 per cent chance of a rate cut from the Fed until its May meeting, according to CME’s FedWatch Tool.
European Central Bank President Christine Lagarde said the euro zone was getting close to reaching the ECB’s medium-term inflation goal, according to an interview published in the Financial Times on Monday.
Trading volumes were likely to be thin in a holiday- shortened trading week as the year draws to a close.
Against the Japanese yen, the dollar strengthened 0.43 per cent to 157.08. The dollar’s rise, coupled with the Bank of Japan standing holding rates steady and Governor Kazuo Ueda’s comments reducing the odds of a Japanese rate hike next month, have left the yen once again near weak levels that have recently pushed Japanese authorities to intervene to support the currency.
Sterling fell 0.33 per cent to $1.2528. The Bank of England on Thursday kept rates on hold, although the split vote was bigger than anticipated.