The dollar eased versus its main rivals on Monday, after posting its biggest daily rise in more than four months in the previous session as hedge funds cut back bearish bets ahead of this week’s highly-anticipated U.S. Federal Reserve policy meeting.
Monetary policy in the United States, Australia and the United Kingdom is in focus, with the Federal Reserve widely expected to announce a tapering of stimulus, a factor that has fueled the greenback’s rise in recent weeks.
Quickening inflation data has prompted some investment banks such as Goldman Sachs to advance their expectations of a rate hike by the Fed as early as July 2022, compared with the third quarter of 2023 previously.
The dollar index, which measures the U.S. currency against six rivals, was down 0.098% at 94.104, hovering close to Friday’s peak of 94.302, its highest since Oct. 13.
“You had a move on Friday based on the PCE and you’ve got a little bit of a pullback right here,” Joseph Trevisani, senior analyst at FXStreet.com said. “Nobody is quite sure of what the fed is going to do.”
The greenback leapt 0.8% on Friday, its biggest single-day spike since mid-June after a 4.4% surge in the government’s index of core personal consumption expenditures – the Fed’s preferred inflation measure – solidified market expectations for a rates lift-off around the middle of next year.
Money markets assign a 50% probability of a 25 basis point rate hike by the Fed by next June, compared with 15% a month earlier, CME futures data shows. The euro edged up 0.04% to $1.15665 after having given up most of its European Central Bank policy gains, touching $1.1535 on Friday, its weakest since Oct. 13.
Hedge fund manager Stephen Jen of Eurizon SLJ Capital in a note to clients said FX markets seem too hawkish on the ECB and too dovish on the Fed. “With a large overhang of long euro positions among the real money community, I believe the euro will remain vulnerable in the months and quarters ahead against the dollar,” he said.
The Reserve Bank of Australia will also decide policy on Tuesday, with markets challenging the central bank’s contention that rates won’t rise until 2024. The Aussie dollar ticked 0.01% higher to $0.7521, having fallen off its nearly four-month high of $0.75555 reached last week.
The British pound touched its lowest in more than two weeks versus the dollar, pressured by uncertainty over the Bank of England’s policy stance and an escalating post-Brexit spat with France over fish.
Most expect the Bank of England will raise rates by 15 basis points to 0.25% on Thursday, although a split vote is likely and some think the bank may hold fire, contenting itself with a hawkish signal.