Written by Tom Westbrook
SINGAPORE (Reuters) – The dollar got off to a steady start to the week on Monday, with investors focusing on inflation data in the United States, Europe and Japan to guide global interest rate expectations.
Searches for “carry” have dominated foreign exchange trading in recent months, punishing currencies with low interest rates and supporting the dollar, while US data has been characterized by hot and cold swings and weakened policymakers' confidence in interest rate forecasts.
Many major pairs have embraced tight ranges. The euro, which rose 0.9% against the dollar last week, was in the middle of the range it has been in for more than a year at $1.0846.
Trading was weak on Monday due to holidays in Britain and the United States.
German inflation on Wednesday and Eurozone readings on Friday will be watched to confirm the European interest rate cut that traders have been anticipating next week.
The pound was testing the upper side of the range it has settled in this year at $1.2735. The Australian and New Zealand dollars retreated from their recent highs, remaining at US$0.6637 and US$0.6122, as markets retreated from expectations of a US interest rate cut.
Friday's reading of the Core Personal Consumption Expenditures Price Index, the Fed's preferred measure of inflation, is expected to be flat on a monthly basis.
The dollar fell again after data showed a slowdown in the rise in consumer prices in April and confirmation of that trend could drag it lower – but the big picture is that inflation and inflation indicators are still above the Fed's 2% target.
“The 2% inflation target appears to be further away than it was late last year, and several lower inflation readings are needed to restore confidence,” analysts at Société Générale said.
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While price uncertainty persists, investors have been chasing income and selling low-yielding currencies such as the yen, yuan and Swiss franc for euros and dollars.
The Swiss franc has declined throughout the year, and last week at 0.9928 francs to the euro touched its lowest level since April 2023. The dollar ended last week weaker at 7.24 to the dollar, its lowest level since early May.
The yen may make its first monthly gain of the year this month thanks to suspected interference from Japanese authorities near the end of April and beginning of May, but it has been declining since then.
The currency exchange rate stabilized at 156.87 against the dollar on Monday, but received little support from rising Japanese government bond yields – for example, at 10 years, they remain about 350 basis points lower than US yields.
The Tokyo Consumer Price Index, scheduled for release on Friday, serves as a reliable guide to the national trend and will be closely watched. Finance Ministry data on Friday will also reveal the scale of Japan's intervention.
The US move to shorten stock market settlement from two days to one day is another factor to watch in currency trading this week, as traders expect it to push trade into quiet early mornings in Asia.
“Asia-based investors will have just a few hours to assemble funding requirements, process trade-related foreign exchange instructions and manage execution,” said Lloyd Rees, head of global custody products for Asia and the Middle East at Bank of New York Mellon (NYSE).
In cryptocurrency markets, Ethereum closed its biggest weekly rise in nearly three years after the surprise approval of some US exchange-traded fund (ETF) applications.
More approvals are still needed before launch, but the price of the second-largest cryptocurrency by market cap rose 25% against the dollar last week and another 5% to reach $3,938 in Asian trading on Monday.
“A month ago, a lot of people would have put the likelihood of an ETH ETF low or far in the future,” said Justin DeNithan, head of partnerships at digital asset market maker Keyrock.