The dollar started the week on a pessimistic note and equity markets rose as traders gauged a tightening in policy divergence between the US Federal Reserve and other major central banks.
An index measuring the greenback against six peers slipped 0.4%, paring steeper declines earlier in the session. The Euro rose 0.7% to trade above parity with the US currency at $1.011. The pound also climbed, adding 0.7% to $1.166.
The euro has fallen more than a tick this year, while the dollar has risen around 13%, the latter propelled higher by aggressive interest rate hikes and hawkish messages from the Fed on the future course of monetary policy.
Last Thursday, the European Central Bank raised borrowing costs by 0.75 percentage points to 0.75% and signaled further increases to come, signaling a more assertive approach to tackling inflation in the region. of the common currency.
The catalyst for the decline in the dollar, which had also fallen slightly on Friday, “appears to be the continued hawkishness of the ECB and the rebound in risk appetite,” wrote Jonathan Petersen, senior economist at Capital Economics.
The dollar has always been considered a safe haven asset in times of economic crisis. “We have a lot of traditional investors hiding in dollar assets; the stronger it gets, the more they hide,” said Mark Tinker, chief investment officer at Toscafund. “That means a lot of people are worried about the dollar turning.”
Stocks on Wall Street rose after the New York opening bell on Monday, with the broad S&P 500 and the tech-heavy Nasdaq Composite gaining 0.6%.
“You have a strong negative correlation between the dollar and the US stock market, with many multinationals having lower earnings when the dollar appreciates,” said Bastien Drut, chief macroeconomic strategist at CPR Asset Management.
European stocks also made gains on Monday. The regional Stoxx 600 rose 1.5% in afternoon trading, while Germany’s Dax index rose 2.1% and London’s FTSE 100 added 1.4%.
Investors will be watching new U.S. inflation data due Tuesday for clues about the future path of rate hikes in the world’s largest economy. Analysts polled by Reuters expect August’s consumer price index to register an 8.1% year-on-year reading, down from 8.5% in July.
A lower-than-expected CPI — helped in part by falling U.S. oil prices — could lower estimates of the extent of the Fed’s interest rate hike, in turn weighing on investor sentiment towards the greenback. In comparison, Europe remains in the grip of an energy crisis which has fueled inflationary pressures.
In the United States “according to our forecasts, inflation has peaked and . . . lower oil prices provide support for further declines going forward,” the SEB analysts wrote. They added that the pace of price growth could diverge between the US and Europe this week, when UK CPI figures are also due.
Markets are pricing in the likelihood of an interest rate hike of 0.75 percentage points at the Fed’s next monetary policy meeting in late September, which would mark the third consecutive hike of such magnitude. The central bank’s current target range is between 2.25% and 2.50%.
Fed Governor Christopher Waller on Friday backed “another significant increase” in interest rates this month, speaking on the last day central bank officials can make public remarks ahead of the next meeting. Politics.
In Asian equity markets, Japan’s Topix rose 0.7%. Markets in Shanghai, Shenzhen, Hong Kong and South Korea were closed for the Mid-Autumn Festival holiday.
Additional reporting by Hudson Lockett in Hong Kong
Dollar slips ahead of US inflation report