Fed's Rate Hikes: US Dollar Drops to Three-Week Low

Key Highlights

• Federal Reserve officials indicate that the cycle of rate hikes is approaching its conclusion.
• The dollar experiences a decline, reaching a three-week low against the yen.
• The market's attention shifts to the release of U.S. inflation data on Wednesday.
• Following the publication of inflation data, the Norwegian crown emerges as the top gainer in the foreign exchange market.
• Chinese inflation data exerts pressure on the yuan, although it remains relatively stable compared to the dollar.

According to reports from Reuters, the US dollar plunged to a three-week low on Monday following comments from Federal Reserve officials that reinforced market expectations of an imminent end to the tightening cycle by the US central bank. Despite Friday's data revealing the smallest job gains in 2-1/2 years, the Fed is widely anticipated to raise interest rates by another 25 basis points this month. The expected rate hike in July would come after a pause by the Fed in June.

Various Fed officials, led by San Francisco Fed President Mary Daly, indicated on Monday that while the central bank may need to raise interest rates further to combat persistently high inflation, the current monetary policy tightening cycle is nearing its conclusion. In afternoon trading, the dollar index, which tracks the US currency against major peers, slipped 0.3% to 101.98, reaching a three-week low.

The euro climbed to three-month highs against the dollar, touching $1.0997 before settling at $1.0995, reflecting a 0.2% increase. Against the yen, the dollar dropped to its lowest level since June 21, reaching 141.32 yen. It was last down 0.6% at 141.335. Following weaker-than-expected US nonfarm payrolls data for June, which missed market expectations for the first time in 15 months, the greenback slid nearly 1.3% on Friday.

Erik Nelson, macro strategist at Wells Fargo in London, stated, "The weaker pressure on the dollar has been hard to reconcile from a relative rates and growth standpoint. U.S. growth has outperformed expectations, while Europe and China have underperformed. I think the U.S. economy is stronger than we give it credit for."

While Friday's employment report highlighted consistently strong wage growth, market expectations of a further rate hike later this month remained intact. Anticipated rate cuts in 2023, which were once expected, now seem unlikely. Attention now turns to US inflation data scheduled for release on Wednesday, with expectations for core CPI to show a 5% annual increase in June.

In other currency news, the Norwegian crown, which has been the second-weakest performing currency in the G10 this year, strengthened following data that revealed continued rise in core inflation in June, reaching a new record. Consequently, the Norwegian crown firmed against both the dollar and the euro. The dollar was last down 1% at 10.493 Norwegian crowns, while the euro dropped nearly 1% to 11.5363 Norwegian crowns.

The Chinese yuan experienced a decline against the dollar due to weak inflation figures in the world's second-largest economy. Data released on Monday showed that factory-gate prices fell at the fastest pace in 7-1/2 years in June, while consumer inflation reached its slowest rate since 2021. These numbers fueled hopes for additional support measures from Chinese authorities. The US dollar remained relatively unchanged against the offshore yuan at 7.230.

The weak Chinese data had a negative impact on the Australian and New Zealand dollars, often used as liquid proxies for the Chinese yuan. The Aussie dollar fell by 0.2% to US$0.6677, while the New Zealand dollar reversed losses to trade 0.1% higher at US$0.6215.