NEW YORK/LONDON: The dollar and euro edged down on Monday after a European Central Bank governor dampened a sudden turn last week in market expectations of a quick hike in interest rates that has lifted regional bond yields in Europe to multiyear highs.
The unexpected jump in US jobs created in January that also was reported last week raised the outlook for a faster timetable for Federal Reserve rate hikes too, poising tension between which of the two currencies will gain an upper hand.
The market is in consolidation after the US labor market report and a hawkish turn by ECB President Christine Lagarde. The ECB is unlikely to raise its main interest rate in July as investors now expect, ECB policymaker Martins Kazaks earlier told Reuters.
"The rally that we've seen in the euro, the demand that we've seen in dollars, is probably going to continue," said Kathy Lien, a managing director at BK Asset Management. "The market is still kind of digesting last week's reports."
The dollar index fell 0.021%, with the euro down 0.04% to $1.1442.
Market participants are waiting to see the release of US consumer price data for January on Thursday, which Lien said should be very strong and reignite expectations the Fed hikes rates by 50 bps in March.
"The euro-dollar will be in a kind of tug of war between these two forces, but ultimately with CPI in the US, we're probably due for a bit more of a dollar recovery," she said.
US dollar falls after private jobs data; euro up as inflation heats up
A Reuters poll of economists expect year-over-year CPI to have climbed to 7.3% in January.
The European common currency hit its highest since mid-January on Friday, driven by the hawkish turn from the ECB.
"President Lagarde's clear signal that the door has opened for rate hikes later this year is a real game changer for the foreign exchange market," said MUFG analyst Lee Hardman.
"Over the past year the EUR has underperformed on the back of expectations that the ECB will maintain loose policy while the BoE and Fed tightens," Hardman said, predicting that market participants would now pare back short euro funding positions.
Not everyone is convinced of a hawkish ECB tilt.
"We don't believe the ECB is bracing for a sudden acceleration of tightening. We still see the Fed as being on track to move well ahead of the ECB, providing support for the dollar," said Mark Haefele, chief investment officer at UBS Global Wealth Management.
He said he expected the euro to fall to $1.10 by year-end and the dollar gaining versus the Swiss franc to finish the year at 0.98 francs per dollar, from 0.92 currently.
Markets have now priced in a one-in-three chance the Fed might hike by a full 50 basis points in March, and a reasonable chance rates will reach 1.5% by year end.
The two-year US Treasury yield, which typically moves in step with interest rate expectations, fell 2.4 basis points to 1.298%.
The Japanese yen strengthened 0.21% versus the greenback at 114.98 per dollar, while Sterling was last trading at $1.3527, down 0.01% on the day.
Bitcoin rose 6.67% to $43,346.06, after jumping 11% late on Friday.