NEW YORK: The U.S. dollar index hit a nearly one-month low on Tuesday after European Central Bank President Christine Lagarde said eurozone interest rates will likely be in positive territory by the end of the third quarter, giving the euro a boost.
Lagarde’s comments implied an increase of at least 50 basis points to the ECB deposit rate and kept speculation alive of bigger rate hikes this summer to fight record-high inflation, partly due to rising energy prices over Russia’s war against Ukraine as well as massive public-sector stimulus the pandemic.
The euro was up 0.39% at $1.0732 at 10:45 a.m. Eastern time. Over the past seven trading sessions, the single currency has rebounded 3.7% after having fallen to its lowest level since January 2017, at $1.0349, earlier this month.
In the United States, most of the foreseeable tightening from the U.S. Federal Reserve has likely been priced in already, said Marshall Gittler, Head of Investment Research at BDSwiss Holding.
“This difference in expectations could propel EUR/USD higher still over the next several sessions as the market has only recently begun to reprice this differential,” he said.
Minutes from the Fed’s May policy meeting are due to be released on Wednesday.
Against a basket of other major currencies, the dollar was down 0.362% at 101.77, its lowest since April 26.
The greenback weakened further after data showed U.S. business activity slowed moderately in May as higher prices cooled demand for services while renewed supply constraints because of COVID-19 lockdowns in China and the war in Ukraine hampered production at factories.
S&P Global said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, showed the pace of growth was the slowest in four months.
Sterling fell sharply against the U.S. dollar after PMI data showed that momentum in Britain’s private sector slowed much more than expected this month, adding to recession worries as inflation pressures ratcheted higher. The British pound was down 0.56% at $1.2515.
The risk-sensitive Aussie dollar dipped 0.43% to $0.7080, while the kiwi was 0.41% weaker at $0.6441, a day before the Reserve Bank of New Zealand is widely expected to raise the key rate by half a point.
Broader sentiment remained fleeting, however, with traders prepared to flee from one asset class to another at the first sign of weakness.
An index of currency market volatility was at 9.46%, not far from a two-year high above 10.5% hit earlier this month.