NEW YORK: The dollar retreated from 10-month highs on Monday in a week packed with key central bank meetings even as uncertainty from the Middle East conflict continues to weigh on markets.
The dollar has benefited from a flight to safety since the US-Israeli strikes on Iran began at the end of February and with oil prices surging. Other major currencies such as the euro have been hurt by their economies’ dependence on oil imports.
But investors are positioning ahead of central bank meetings this week, including from the US Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan.
The euro reversed course after hitting a 7-1/2-month low earlier in the session, trading 0.62 percent higher at USD1.1485. Sterling was up 0.61 percent at USD1.3302 - just above the 3-1/2-month low it hit on Friday.
The dollar index was down 0.39 percent to 99.95, but was still trading near Friday’s 10-month high of 100.54.
“The market has priced in a lot of hawkishness purely based on expectations of higher inflation because of this oil shock. I think that’s very misplaced and will eventually work its way out in the coming weeks and maybe months,” Epstein added.
“That’s all directly affecting the dollar because if you look at the market expectations for Fed policy, we were priced in two cuts fully for 2026 and 50 percent chance of a third cut. Now, we are barely pricing in one cut.”
The market is currently estimating a near 100 percent chance that the Fed will keep rates unchanged at the end of its meeting on Wednesday, according to the CME’s FedWatch tool. Trump called on allies over the weekend to help secure the strait and said his administration was talking to seven countries about it. The Wall Street Journal reported that Washington plans to announce as early as this week that multiple countries have agreed to escort ships through the waterway.
Brent crude futures were down 2 percent at USD102.2 a barrel, while US West Texas Intermediate crude was down 4.6 percent to USD94.14. Both contracts have surged more than 40 percent this month to their highest since 2022 driven by the Middle East conflict.
The Australian dollar rose 1.2 percent to USD0.70625, buoyed by hawkish rate expectations at home with the Reserve Bank of Australia expected to tighten policy on Tuesday. Markets now price in a roughly 72 percent chance that the RBA could deliver a 25-basis-point hike. The yen traded just below 160 per dollar - its weakest levels since the last intervention to strengthen the currency in July 2024.
The yen won a reprieve, pushing the dollar down 0.37 percent to 159.12 yen.
Elsewhere, the dollar weakened 0.25 percent to 6.887 versus the offshore Chinese yuan.
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