The dollar index fell 0.045 per cent, with the euro down 0.03 per cent to $1.1443
The dollar and the euro both eased on Monday after European Central Bank President Christine Lagarde calmed market expectations of a quick hike in interest rates that pushed regional bond yields in Europe up to multi-year highs.
There is no need for big monetary policy tightening in the euro zone as inflation is set to decline and could stabilize around the ECB’s target of 2 per cent, Lagarde told a European Parliament hearing.
Last week the ECB opened the door to a rate hike later in 2022 as inflation risks rose, while data showing an unexpected jump in U.S. jobs created in January also raised speculation of a faster timetable for the Federal Reserve to hike rates.
The new rate expectations for both the Fed and ECB pit the dollar and euro against each other as to which will gain an upper hand. U.S. consumer price data to be released on Thursday is poised to be a key data point determinant.
The euro-dollar will be in a kind of tug of war between these two forces, but ultimately with CPI in the U.S., we’re probably due for a bit more of a dollar recovery, said Kathy Lien, a managing director at BK Asset Management.
A Reuters poll of economists showed they expect year-over-year CPI to have climbed to 7.3 per cent in January.
The major currencies traded in a tight range near break-even. The dollar index fell 0.045 per cent, with the euro down 0.03 per cent to $1.1443.
The ECB last week got the ball moving in a positive direction for the euro, said Joe Manimbo, senior market analyst at Western Union Business Solutions.
Now the focus has shifted to U.S. inflation, which the market will use to figure out whether the Fed goes by 25 basis points or 50 basis points next month, Manimbo added.
Markets have now priced in a one-in-three chance the Fed might hike by a full 50 basis points in March, and a reasonable chance rates will reach 1.5 per cent by year end.
The European common currency hit its highest since mid-January on Friday, driven by the hawkish turn from the ECB.
