Investing.com – The dollar began the week testing a fresh nine-month low, as market participants bet on a volume cut for the second consecutive meeting in February.
Fed officials are entering the “quiet period” ahead of the February 1 policy meeting, but a report in the Wall Street Journal over the weekend reinforced expectations that the next move higher would be a modest 25 basis points, rather than the 50 basis points seen at the last meeting. .
The currency, which measures the greenback against a basket of advanced economy currencies, fell 0.5% to 101.315, extending losses from the previous week. It has now wiped out virtually all of the gains it made since the Fed started raising interest rates last March.
A wave of weak economic data last week – with notable declines in retail sales and industrial production – gave the impression that the US economy slowed sharply at the end of the year, although strength in the labor market remained. This will likely be visible in the first US GDP reading on Thursday, as the quarterly growth rate is expected to slow to 2.6% from 3.2% in the third quarter.
“The data agenda should keep the dollar on the weak side this week,” ING’s Chris Turner said in a note to clients. added:
“However, the US dollar index has already come a long way and we doubt whether the market is ready to add dollar shorts ahead of next week’s FOMC meeting.”
The euro is outperforming
By contrast, other currencies whose central banks have been slower to start raising interest rates have outperformed, as those institutions are still playing catch-up. It rose 0.5% to $1.0913 after a series of comments at the World Economic Forum by European Central Bank officials who insisted the next price move would be “significant” – more than 25 basis points. However, the market is still pricing in the first ECB rate cut by the end of the year.
The yen continues to rise
Similarly, the Yen continues to rise as the market tests the Bank of Japan’s resolve to defend its long-term yield target.-
Finance Minister Shunichi Suzuki told parliament on Monday that “Japan’s public finances have sharpened to an unprecedented degree” as it struggles to maintain demand in the wake of the pandemic. This situation makes the government unprepared to deal with the increasing burden of debt service.--
Markets are set to be generally quiet on Monday, with the start of the Lunar New Year holiday in China and a dearth of market-moving data elsewhere.
However, the two currencies likely to come into focus later are the Brazilian real and the Argentine peso, after their countries began talks about creating a common currency. The real, though always volatile, has been a model of stability relative to the peso in recent years.
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