On Monday, statements indicating further large interest rate increases in Europe contrasted with market expectations for a less aggressive Federal Reserve, causing the euro to reach a nine-month high versus the dollar.
The euro traded at its highest level since April of last year, breaking the previous milestone of $1.08875, and reaching a high of $1.0927. At $1.0878, it was last up 0.2%.
Members of the European Central Bank (ECB) governing council Klaas Knot and Peter Kazimir pushed for two more 50 basis point increases at meetings in February and March, which benefited the euro.
An ultimate rate peak of 3.25% from the present rate of 2% was likewise predicted by analysts surveyed by TradingTwist, who also supported increases of 50 basis points at the following two meetings.
According to Jane Foley, head of the currency strategy at Rabobank, the euro was also helped by a reduction in recessionary worries coupled with a drop in natural gas costs.
“The euro narrative is part of the improvement in confidence in the economic outlook, or at least the removal of a lot of the pessimism,” Foley said.
“On top of that, it appears that the ECB will continue raising interest rates rather aggressively,” Foley continued.
In contrast, futures have steadily decreased the expected peak for rates from the present range of 4.25% to 4.50% to 4.75% to 5.0%, pricing out nearly any possibility that the Fed will rise by 50 basis points next month.
Additionally, investors have approximately 50 basis points of rate reduction from the United States priced in for the second half of the year due to weaker inflation, consumer spending, and housing statistics.
This week’s forthcoming flash surveys on January’s economic activity are anticipated to reveal more improvement in Europe than in the United States due to declining oil prices.
If the most recent PMI surveys are to be accepted, the U.S. has lost its global growth leadership position, according to Ray Attrill, head of FX strategy at NAB.
Furthermore, he continued, “U.S. inflation is seen declining farther and quicker than the Fed’s own estimates.” The USD has the potential to drop even more this year in this scenario.
The dollar index, which compares the value of the dollar to a basket of currencies, remained unchanged at 109.96, just above its eight-month low of 101.510.
After the Bank of Japan (BOJ) refused to budge from its ultra-easy bond control policy last week, the dollar strengthened versus the yen.
Analysts predict that the BOJ would maintain its position at least until the March policy meeting, notwithstanding the likely appointment of a new BOJ governor in February.
After dramatic swings between 127.22 and 131.58 last week, the dollar was up 0.6% at 130.345 yen.
Prior to the Bank of Canada’s interest rate decision on Wednesday, the Canadian currency was slightly higher at $1.3354 to the US dollar. The markets were anticipating a quarter-point increase to 4.5%.
The pound increased to $1.24475, its highest level in seven months, before sliding 0.3% to $1.2355 in the following days.