Dollar retreats as markets rethink Fed rate bets, eye ECB hikes

The U.S. dollar struggled versus its major rivals on Monday as softening inflation expectations prompted a reassessment of the prospects for aggressive interest rate hikes but volatile markets cushioned a broader decline.

Aggressive rate hike bets have boosted the dollar with an index rising to a near two-decade high of 105.79 earlier this month. But with some high-frequency data indicators showing economic momentum starting to cool and a broader drop in commodity prices, investors are becoming cautious. (.CESIUSD)

“It’s hard for Wall Street to confidently say there is a bottom in place, so a lot of traders are still looking to fade whatever rallies emerge,” said Edward Moya, senior market analyst at OANDA.

Against its rivals, the dollar edged 0.12% lower to 103.9. Earlier this month, it hit 105.79, its highest since late 2002.

Futures pricing shows traders now anticipating the U.S. Federal Reserve’s benchmark funds rate stabilizing around 3.5% from March next year, a pullback from pricing in rates zooming to around 4% in 2023.

“Today is a consolidation day,” said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC.

“I think that we’re just waiting for more data, and that data comes out later this week,” he added, pointing to a readout expected on Friday detailing consumer prices in the euro zone.

Meanwhile, the euro was buoyed by expectations that the European Central Bank will soon raise interest rates for the first time in more than a decade.

“Everyone is looking forward to this first rate hike that we’re going to get from the ECB, and I think that the risks of a dovish hike are fading,” said Moya.

The euro was up 0.27% at $1.0587.

The euro led gainers versus the dollar as the European Central Bank’s annual forum on central banking in Sintra, Portugal, got under way with ECB President Christine Lagarde and U.S. Federal Reserve Chair Jerome Powell both attending the meeting. Markets will watch for any signs of future policy moves.

Commodity currencies came under pressure on Monday as data showed profits at China’s industrial firms shrank again, albeit at a slower pace, in May after a sharp fall in April.

Elsewhere, Russia’s rouble weakened in the interbank market as Russia headed for its first sovereign default since the Bolshevik revolution a century ago.

Cryptocurrencies stumbled, with the world’s biggest cryptocurrency Bitcoin down 1.7% trading at $20,810.34. It fell to as low as $17,588.88 earlier this month.