NEW YORK: The dollar index fell on Monday while the euro rallied after the European Central Bank indicated a move from negative interest rates, and riskier currencies gained ground along with equities.
ECB President Christine Lagarde said in a blog post that the bank was likely to lift the euro area deposit rate out of negative territory by the end of September and could raise it further if it saw inflation stabilising at 2%.
After declining last week, US equities followed European stocks higher on Monday.
The euro’s rally came as the dollar fell broadly, with a selloff that began accelerating last week.
Investors had more appetite for riskier assets on Monday as they reacted to Lagarde’s comments and easing worries that a European recession was imminent while the US outlook looked less inspiring, according to Erik Nelson, macro strategist at Wells Fargo, New York.
“We’re seeing more optimism around global growth - European growth, Chinese growth, UK growth, and a little bit less optimism about US growth. So the growth divergence theme is really a big thing and moving out of favor for the dollar,” he said.
The euro was the big gainer, last up 0.92% at $1.0666 , having risen as much as 3.3% from its multi-year intraday low of $1.0349 on May 13.
The US dollar index, up about 16% to a two-decade high to 105.01 over the 12 months to the middle of May, was last down 0.73% on Monday at 102.19.
Last week speculators’ net long positioning on the US dollar slipped, after hitting their highest level since late November in the previous week, according to calculations by Reuters and US Commodity Futures Trading Commission data released on Friday.
The US dollar has soared this year but with expectations for repeated Federal Reserve interest rate hikes priced in, Wells Fargo’s Nelson said it may trade sideways for some time.
“The Fed will have a hard time becoming incrementally more hawkish,” he said.
The Australian dollar, which initially showed a muted reaction to the victory for the centre-left Labor Party in national elections at the weekend, was up 0.89% at $0.7113 .
CHINA BOOST
Meanwhile the Swiss franc was gaining against the dollar after Swiss National Bank governing board member Andrea Maechler said in an interview published on Monday that the bank will tighten monetary policy if inflation in Switzerland remains persistently high. The dollar was last down 0.96% against the Swiss franc after hitting its lowest level since late April.
Sentiment around China also helped riskier currencies. Shanghai is edging out of lockdown, and an unexpectedly big rate cut in China last week reassured investors. Also China will broaden its tax credit rebates, postpone social security payments and loan repayments, roll out new investment projects and take other steps to support the economy, state television quoted the Cabinet as saying on Monday.
The yuan had its best week since late 2020 last week and in offshore markets on Monday firmed to 6.6542 per dollar , its strongest since early May.
Geopolitics are also in focus in Asia this week as US President Joe Biden tours the region.
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