© Reuters. FILE PHOTO: US dollar banknotes are seen in this illustration taken on March 10, 2023. REUTERS/Dado Rovic/Illustration
Written by Samuel Indyk and Ray Wei
LONDON (Reuters) – The dollar fell on Monday as traders remained alert ahead of policy decisions this week from several central banks, including the Federal Reserve, which is expected to keep interest rates on hold for the first time since January 2022.
Monetary policy meetings of the Federal Reserve, European Central Bank (ECB) and Bank of Japan (BOJ) will set the tone for the week as markets seek clues from policymakers on the future path of interest rates.
US inflation data for May is also released on Tuesday as the Federal Reserve begins its two-day meeting.
“Currency markets should be quiet today due to the important meetings from the Federal Reserve and the European Central Bank on Wednesday and Thursday,” said Niels Christensen, senior analyst at Nordea.
Money markets are leaning towards a pause from the Federal Reserve when it announces its interest rate decision on Wednesday, according to CME FedWatch, expectations that sent global stocks surging to a 13-month high on Friday as risk sentiment improved.
Conversely, a clear majority of economists polled by Reuters expect the ECB to raise its key rate by 25 basis points this week and again in July, before pausing for the rest of the year as inflation holds steady.
“We are very much with the consensus, and we expect the Fed to remain unchanged this week and raise 25 basis points from the ECB,” Nordea’s Christensen said.
“When we get out of the summer, the market will be very focused on when the Fed will start cutting interest rates and that could leave the dollar a bit weak going forward,” Christensen added.
It recorded a loss of nearly 0.5% last week, its worst weekly decline since mid-April, and was last down 0.1% at 103.39.
The euro rose 0.2% to $1.0772 in early London trading, after rising 0.4% last week, its first weekly gain in nearly a month.
Elsewhere, the Japanese yen fell to 139.49 against the US dollar, ahead of the Bank of Japan, which is expected to maintain ultra-loose monetary policy and expect a moderate economic recovery, as robust corporate and household spending cushions the blow from slowing external demand. to Reuters.
“Our economists were expecting the Bank of Japan to keep policy unchanged next week, before likely changing the YCC in July along with the bank’s inflation outlook,” said Goldman Sachs (NYSE:NYSE:NYSE) analysts.
“If this proves to be true, we believe that the JPY’s tactical weakness could extend against the US dollar and across the currency pairs, especially given our view that we should continue to remain on the back of higher US interest rates and support for risk sentiment.”
The RBNZ signaled last month that it was done tightening after raising interest rates to the highest level in more than 14 years at 5.5%, ending the most aggressive hiking cycle since 1999. That led to a 2.7% drop in May.
The New Zealand dollar rose 0.1% to $0.6135, not far from a two-week high of $0.6138 on Friday, and the British pound rose 0.1% and rose 0.3% to $0.6763, with a holiday in most of Australia making trade thin.
China extended losses to trade at the lowest level since November last year as recent weak data raised expectations about monetary easing from the People’s Bank of China this year.