U.S. Dollar Makes Minuscule Gains As Traders Weigh Rate Paths Ahead

The U.S. dollar searched for direction on Monday as investors continued to digest last week’s raft of central bank meetings. The currency still benefited from a widening policy gap with its rivals and the specter of a global economic slowdown.

The greenback rose just 0.029% to 102.31, not far from a one-month low of 102.00 it touched on Friday. Investors are awaiting data and critical events in the coming days, including consumer prices, retail sales, and factory output. These could provide clues about the path of interest rates this year.

Data from Europe on Tuesday may rekindle speculation that the European Central Bank will delay another monetary policy tightening until later this year, possibly even in March. Traders also look forward to comments from the ECB’s new president, Francois Villeroy de Galhau, on Thursday.

In the United States, investors are also waiting to hear from Federal Reserve Chair Jerome Powell, who is due to testify in front of a House committee on Wednesday and before the Senate Banking Committee on Thursday. Markets expect Powell to give more details about the Fed’s rate path, particularly its plans for future rate hikes.

As the world’s dominant reserve currency, the dollar is the currency many foreign exchange traders choose. But Setser warns that a shift to other currencies increasingly used in international trade and investment could threaten the dollar’s dominance. In particular, the euro and the Chinese renminbi are growing in popularity among investors as alternatives to the dollar.

This year, the yen has fallen to multi-year lows against the dollar as investors dumped it for higher-yielding assets elsewhere. That has put pressure on the BOJ to do more to support inflation and the economy, and on Friday, the bank said it would keep its ultra-easy policy intact. The central bank said it was still working to spur wage growth and cost-push inflation but that it will continue to “patiently sustain its policy” until it is clear that more demand-driven price rises are taking hold.

The BOJ decision hurt financial issues, which are sensitive to interest rates. Mitsubishi UFJ Financial Group dropped 4.1 percent, and Sumitomo Mitsui Trust Holdings fell 1.1 percent. Export-oriented shares were bright, with Canon jumping 4.9 percent and Olympus rising 3.8 percent. Investors also turned cautious ahead of data later in the day, which is expected to show that factory activity in Japan rose in April. Retail sales and producer prices are also scheduled for release. This will give a picture of the underlying pace of growth in the world’s third-largest economy. The country’s economy has been stagnant for a decade. Inflation is currently running at an annualized rate of 2.2%. It is expected to accelerate in the year’s second half, with prices rising faster than wages. That suggests consumer price inflation will also be more robust than the current official target of 2%.


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