Dollar hovers around 15-month lows ahead of Fed, ECB meetings

LONDON/SYDNEY, July 17 (Reuters) – The dollar edged lower against a basket of currencies on Monday after suffering its biggest weekly drop of the year as traders awaited economic data and policy decisions before selling off further.

The euro continued to climb, rising 0.1% to $1.1234, after hitting a fresh 16-month high earlier in the day. Against the yen, the dollar fell 0.28% to 138.36 yen per dollar, after hitting a two-month low against the Japanese currency on Friday.

“Last week’s US disinflation shock changed the currency landscape, but a few days without key data releases will tell us whether that impulse can keep the dollar on the back foot as the FOMC risk event approaches,” said Francesco Pesole, currency strategist at ING. so.

“The Euro/Dollar seems a bit overextended in the short term and could face a correction this week,” he added.

Last week’s US inflation data fueled investors’ bets that the Federal Reserve was nearing the end of its rate hike cycle, and the dollar index posted its biggest weekly decline since November 2022, falling 2.25% on the week.

U.S. producer prices barely rose in June and the annual increase in producer inflation was the smallest in nearly three years, data showed on Thursday, a day after data showed consumer prices rose modestly last month.

In Germany, the Bundesbank said on Monday that the eurozone’s biggest economy could shrink this year by more than the 0.3% decline expected just weeks ago, despite a slight contraction in the second quarter.

Industry-heavy Germany is bearing the brunt of a fall in global demand for goods – the result of higher borrowing costs dampening investment and people spending more on leisure, travel and other services in the wake of the pandemic.

Both the Fed and the European Central Bank are expected to raise interest rates next week, but beyond that, market pricing suggests that the Fed is likely to stop, before cutting next year, while in Europe a new increase is likely to beckon. ,

“The currency market is ahead of possible Fed policy normalization in 2024,” said Chris Weston, head of research at broker Pepperstone in Melbourne.

“The question then is whether the dollar selling has gone too far and we are at risk of an average reversal early this week.”

The US dollar index fell 0.07% to 99.891.

CHINESE DATA

Elsewhere, Chinese growth data came in slightly above low expectations on Monday, but without sparking much of a currency market response as traders had already priced in a sluggish quarter and are waiting to see if the government steps up stimulus to boost spending.

The Australian and New Zealand dollars retreated, with the Aussie last down 0.36% to $0.6814 – off last week’s peak of $0.6895 – and the Kiwi down 0.48% at $0.6338 after hitting a five-month high of $0.6412 on Friday.

“The data suggests that China’s post-COVID boom is clearly over,” Commonwealth Bank of Australia strategist Carol Kong said. “But the markets already had low expectations, and the reaction from here is quite limited.”

Strong gains in the yen have slowed as traders weigh whether the ultra-dovish Bank of Japan is likely to make any changes at its policy meeting next week, given rhetoric suggesting it is in no rush.

The Swedish and Norwegian krone continued to rise after gaining more than 5% against the dollar last week. The Swedish krona rose 0.2% to 10.2360 against the dollar, the Norwegian krone instead rose 0.4% to 10.0160.

At $1.3083, sterling was parked just below last week’s 15-month peak.

Reporting by Joice Alves in London and Tom Westbrook in Sydney, Editing by Angus MacSwan and Andrew Heavens

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