NEW YORK: The dollar edged lower against the euro on Monday, as the common currency found support from European Central Bank officials’ comments signalling additional jumbo interest rate rises in Europe.
The euro reached as high as $1.0927, to trade at its highest level since April last year, before paring gains to trade up 0.1 % at $1.0865.
The euro’s early gains were aided by comments from European Central Bank (ECB) governing council members Klaas Knot and Peter Kazimir, who both advocated for two more 50 basis point hikes at meetings in February and March.
A Reuters survey of analysts also favoured hikes of 50 basis points at the next two meetings and an eventual rate peak of 3.25%, from the current rate of 2%.
“Really what’s driving things is central bank policy divergence,” said Joe Manimbo, senior market analyst at Convera in Washington.
“At least in the current cycle, the market thinks the Fed’s most hawkish days are behind it. So when you weigh the outlook for central bank policy, it depicts the dollar at a disadvantage, given market bets on the Fed moving more slowly than its counterparts abroad,” Manimbo said.
Fed fund futures have priced out almost any chance the Fed could move by 50 basis points next month and have steadily lowered the likely peak for rates to 4.75% to 5.0%, from the current 4.25% to 4.50%.
The euro was also being supported by an easing of recession fears amid a fall in natural gas prices, according to Rabobank head of currency strategy Jane Foley.
“The growth in confidence in the economic outlook, or at least the removal of a lot of the pessimism, is part of the euro story,” Foley said.
The dollar, which has risen against the yen after the Bank of Japan (BOJ) defied market pressure to reverse its ultra-easy bond control policy last week, was up 0.68% at 130.48 yen , following last week’s wild gyrations between 127.22 and 131.58.
“The Bank of Japan, this month, signalling a hesitancy to turn hawkish has really taken some steam out of the yen’s rebound,” Manimbo said.
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