US Dollar Weakens Amid Uncertainty Over Fed Rate Cuts and Middle East Tensions
US Dollar Index Drops Slightly Despite Recent Gains
The US dollar slightly decreased in early European trading on Monday, although it remained elevated due to uncertainties surrounding Federal Reserve rate cuts and heightened tensions in the Middle East, which dampened risk appetite.
At 04:00 ET (09:00 GMT), the Dollar Index, tracking the greenback against a basket of six other currencies, was 0.1% lower at 105.710. This level is near its highest since early November, following a 1.7% increase last week, marking its most significant weekly gain since September 2022.
Dollar Strengthens on Safe Haven Demand
The US dollar experienced some profit-taking at the start of the week but remains in demand. This demand was boosted by safe-haven sentiment after an Iranian strike on Israel over the weekend heightened concerns about a potential wider regional conflict alongside the ongoing Israel-Hamas conflict in Gaza.
Analysts at ING noted that despite calls for restraint from Western allies, the market anticipates that the Israeli government will refrain from aggressive actions against Iranian military or nuclear facilities. However, the situation in the Middle East remains fluid, suggesting that implied FX volatility will remain elevated for some time.
Fed Likely to Delay Rate Cuts
Last week, the US dollar benefitted from hotter-than-expected inflation data, leading to expectations that the Federal Reserve may postpone interest rate cuts to prevent a resurgence of inflation. Currently, investors are pricing in only 50 basis points of rate cuts in 2024, a significant decrease from the 150 basis points priced in at the beginning of the year.
March data on retail sales are set to be released later in the session, with expectations of a 0.4% increase, slower than the previous month’s 0.6% growth. ING suggested that weak retail sales data may not significantly alter expectations for Fed actions this year, following the high US inflation figures from the previous week.
Euro Rebounds from Five-Month Low
The euro saw a 0.2% increase to 1.0659 in Europe, bouncing back from a five-month low of 1.0622 reached on Friday. Dovish comments from several European Central Bank officials hint at a rate cut in June, potentially preceding the Fed’s rate-cutting cycle.
While Eurozone inflation hovers slightly above the ECB’s 2.0% target, economic growth in the region remains weak. Recent data showed that Eurozone industrial production rose by 0.8% in February, but this still represented a 6.4% annual decline.
Sterling Recovers Amid UK Data Releases
The pound rose by 0.3% to 1.2487, with sterling showing slight improvement after last week’s significant weekly drop. This week, the UK is set to release unemployment data on Tuesday and the latest consumer price index on the following day.
ING highlighted that while market expectations for a Bank of England rate cut in June are at 31%, any negative surprises in wage or services data could have a substantial impact on sterling.
Japanese Yen Weakens to 34-Year Low
The Japanese yen weakened by 0.3% to 153.81, nearing a 34-year low observed earlier in the session. Traders are cautious about potential currency market interventions by the Japanese government following repeated warnings from officials in recent weeks.
The Chinese yuan edged higher to 7.2386, maintaining stability after the People’s Bank of China left medium-term lending rates unchanged.
