Market Analysis

The dollar had a steady start to the week as investors awaited inflation data from the U.S., Europe, and Japan to inform the global interest rate outlook.

In recent months, foreign exchange trade has been driven by the pursuit of "carry," favoring higher-yield currencies and supporting the dollar. U.S. data has been mixed, affecting policymakers' confidence in the rate outlook.

Major currency pairs have been trading in tight ranges. The euro, which gained 0.9% against the dollar last week, was at $1.0846, within the range it has held for over a year. Trading was light on Monday due to holidays in Britain and the U.S.

German inflation data on Wednesday and euro zone readings on Friday are anticipated for confirmation of a European rate cut expected next week.

Sterling was testing the upper end of its range for this year at $1.2735. The Australian and New Zealand dollars have eased from recent highs, with the Aussie at $0.6626 and the kiwi at $0.6122, as markets reduced expectations for U.S. rate cuts.

Friday's core personal consumption expenditures (PCE) price index, the Federal Reserve's preferred inflation measure, is expected to remain steady month-on-month. Any surprises could impact currency markets.

The dollar had weakened after data showed a slowdown in consumer price rises in April and disappointing retail sales, but strengthened last week due to better-than-expected PMI survey data.

"Focus on core PCE revolves around whether the drivers of inflation are part of the consumer mood shift," said Bob Savage, BNY Mellon's head of markets strategy and insights.

CARRY ON

With ongoing rate uncertainty, investors have been seeking income by selling low-yield currencies like the yen, yuan, and Swiss franc against the euro and dollar.

The Swiss franc has been declining all year, reaching its lowest since April 2023 at 0.9928 francs per euro last week. China's yuan ended last week weaker than 7.24 per dollar, its lowest level since early May.

The yen may achieve its first monthly gain of the year due to suspected intervention by Japanese authorities in late April and early May. However, it has been slipping back towards multi-decade lows, steady at 156.87 to the dollar on Monday, despite rising Japanese government bond yields, which remain nearly 350 basis points below U.S. yields.

Tokyo's CPI, due on Friday, is a reliable indicator of the national trend and will be closely watched. The U.S. move to shorten equity-market settlement from two days to one will also be monitored in currency trade, as dealers expect it may drive trading into the early mornings in Asia.

"It remains to be seen how each bank or liquidity provider will respond once the T+1 changes go into effect and there is a practical need to execute sizeable FX trades during currently illiquid timeframes," said Scott Gold, head of sales at BidFX, a trading technology platform.

"Currently, only around 0.6% of all FX volume is executed between 4 – 6 p.m. (New York time), so it's very illiquid and spreads are considerably wider."

In cryptocurrency markets, ether recorded its largest weekly rise in nearly three years following a surprise approval for some U.S. exchange-traded fund (ETF) applications.

Further approvals are required before launch, but the price of ether, the second-biggest cryptocurrency by market value, rose 25% against the dollar last week and was last at $3836.

"A month ago, many people would've considered the likelihood of an ETH ETF low or far in the future," said Justin D'Anethan, head of partnerships at digital assets market maker Keyrock.

Paraphrasing text from "Reuters" all rights reserved by the original author.