By Saikat Chatterjee
LONDON (Reuters) – The U.S. dollar struggled against its main rivals on Monday as lower inflation expectations prompted a reassessment of prospects for aggressive interest rate hikes, but market volatility dampened a decline wider.
Aggressive betting on higher rates boosted the dollar with the index hitting a nearly two-decade high of 105.79 earlier this month. But with some high-frequency data indicators showing economic momentum beginning to cool and a broader decline in commodity prices, investors are becoming cautious.
“The dollar index is trading down from its recent trading range, suggesting some vulnerability to further weakness,” said Scotiabank analyst Shaun Osborne.
“We believe the broader dollar rally will struggle to expand significantly, but losses are likely to remain limited unless or until a larger bearish catalyst emerges.”
Against its rivals, the dollar edged down 0.2% to 103.86. Earlier this month it hit 105.79, its highest since late 2002.
While fears of slowing growth weighed on sentiment, lower inflation expectations, mainly due to falling commodity prices, also eased pressure for higher rates.
For example, copper is on track for its biggest monthly decline since the pandemic-fueled selloff in March 2020. Oil prices are set to see a monthly decline for the first time this year.
Falling commodity prices have weighed on expectations for a peak in US interest rates next year. Higher terminal pricing in benchmark interest rates has been a key support for the dollar, but that source of strength has faded in recent days.
Futures pricing shows traders now expect the US Federal Reserve’s benchmark funds rate to stabilize around 3.5% from March next year, a pullback from the pricing of futures. rate which would reach approximately 4% in 2023.
“Overall, markets have therefore priced in a lower and earlier terminal rate from the Fed, which reduces some of the attractiveness of the dollar based on a yield differential,” Simon Harvey said. , head of FX analysis at Monex Europe.
The euro led the gains against the dollar as the European Central Bank’s annual forum in Sintra kicked off with ECB President Christine Lagarde and Federal Reserve Chairman Jerome Powell all in attendance. two present at the meeting. Markets will be watching for any signs of future policy developments.
The euro is up 0.2% at $1.0580.
Commodity currencies came under pressure on Monday, with data showing that profits at Chinese industrial companies fell again, albeit at a slower pace, in May after a sharp decline in April.
Elsewhere, the Russian ruble weakened in the interbank market as Russia headed for its first sovereign default since the Bolshevik Revolution a century ago.
Cryptocurrencies consolidated their gains, with the world’s largest cryptocurrency, Bitcoin, up 1.4%, trading at $21,170.88 after falling to $17,588.88 earlier this this month.
(Reporting by Saikat Chatterjee; Editing by Muralikumar Anantharaman and Jane Merriman)
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