The Dollar Soared On Monday Along With The Euro And Sterling

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The U.S. dollar recovered from an eight-month low on Monday. The dollar index surged forward by 0.03% to 101.92 against a basket of six major currencies. Last week, the greenback plummeted to an eight-month low, exchanging hands at 101.50. Today’s gains were also modest as investors expect the U.S. Federal Reserve to take the dovish course when it announces its interest rates at its meeting. Other central banks will also make rate decisions this week, but they will likely be more hawkish than the Fed.

Meanwhile, the dollar remains on track for a fourth straight monthly loss. The currency shaved off more than 1.5% as expectations that the agency was approaching the end of its rate-hike cycle weighed on it. Traders fear policymakers won’t hike interest rates as high as they did previously.

On Monday, the British Pound climbed by 0.04% and traded at $1.2405. At the same time, the common currency jumped by 0.06% to $1.0874. The European Central Bank and the Bank of England are also scheduled to meet later this week. Markets were subdued ahead of these meetings.

Rodrigo Catril, the currency strategist at National Australia Bank (NAB), noted that the traders are trying to assess how the major central banks behave. He thinks what they say will likely be more important than what they do.

Investors widely expect the Federal Reserve to deliver a 25-basis point rate increase. That will be lower than its 50bp and 75bp hikes seen in 2023. Moreover, analysts say the ECB and BoE will probably increase rates by 50bp each.

The euro seems set for an almost 1.5% monthly gain. ECB policymakers’ hawkish rhetoric supported the currency over the last weeks, diffusing fears of a deep economic recession in the euro area.

How Are the Japanese Yen and Aussie Faring? 

The Japanese Yen rallied by almost 0.2% to 129.62 per USD today. A panel of business executives and academics asked the Bank of Japan to change its 2% inflation target from a short-term goal to a long-term one. They are worried about the soaring cost of prolonged monetary easing.

Meanwhile, the New Zealand dollar plummeted by 0.05% to $0.6491. The Australian dollar also ended in the red, tumbling by 0.3% to $0.7088. Despite that, the Aussie remained on track for an almost 4% monthly gain. Australia’s inflation rate skyrocketed to a 33-year high last quarter, surprising the markets and convincing most investors that the Reserve Bank of Australia would further tighten its interest rates.

Moreover, Chinese markets are opening after the Lunar New Year holiday. Traders will likely focus on the country’s purchasing managers’ index (PMI) data. The latter is due on Tuesday. NAB’s Catril noted that thus far, the data from China encourages the view that reopening will be smooth in terms of activity. On Saturday, state media reported that Lunar New Year holiday trips jumped by 74% in the country compared to last year after the government removed coronavirus travel curbs.

Consequently, the onshore yuan gained against the greenback today. It added approximately 0.5% to 6.7530, as traders were optimistic due to signs of economic recovery.

What About the EM Currencies? 

Asian currencies also traded in the green on Monday as Chinese markets resumed exchange. On the other hand, stock markets across the region plummeted. China and Taiwan were the only ones trading in bullish territory. Moreover, Chinese stocks jumped thanks to a rebound in travel and strong consumer spending. Taiwan shares also reached their highest level since late June.

Thailand’s baht soared by 0.3%. It remained near its highest point in more than 10 months at last. Analysts at MUFG Bank stated that considering the modest Fed rate increases outlook, they see some potentially stronger forex movements this week versus the dollar.

Most central banks in Southeast Asia are also becoming more dovish regarding policy tightening. Malaysia’s central bank paused hiking rates unexpectedly, while Indonesia hinted at an early end to its current cycle. In addition, the Bank of Thailand spoke about more measured tightening in the coming months. Investors expect the Reserve Bank of India to pause its rate-raising cycle after delivering a modest 25 bps hike at its next meeting.

Philippine shares shaved off the most among the region’s stock markets today, dropping by 1.7% to a two-week low, while Indian shares declined by 0.2%.

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