Tom Westbrook and Amanda Cooper
SINGAPORE/LONDON (Reuters) – The dollar was flat on Monday but is on track for its first monthly decline this year as investors focus on inflation data from the United States, Europe and Japan that will shape the outlook for global interest rates.
Foreign exchange trading has been dominated in recent months by the search for “carry,” putting pressure on low-yielding currencies and supporting the dollar while U.S. data has swung up and down, undermining confidence in policymakers’ interest-rate outlook.
Several major currency pairs are stuck in tight ranges. The euro, which rose 0.9% against the dollar last week, remains at the midpoint of its range of $1.085, where it has remained for more than a year.
A German business confidence survey released on Monday showed it worsened in May, contrary to expectations of an improvement, but the euro barely reacted.
Trading volumes were light on Monday due to public holidays in the UK and US.
German inflation data on Wednesday and euro zone data on Friday will be closely watched as traders gauge any European interest rate cuts expected next week.
The pound was testing the upper end of the range it has held this year at $1.2735.
The U.S. core personal consumption expenditures price index, the Federal Reserve’s preferred inflation gauge, is due out on Friday and is expected to be flat from the previous month.
The dollar has weakened after data showed consumer price inflation slowed in April, and could weaken further if that trend is confirmed, but overall inflation rates and measures of inflation remain above the Fed’s 2% target.
The dollar index, which measures the performance of the U.S. currency against six other currencies, last traded slightly lower at 104.71. It is expected to fall 1.5% in May, its biggest one-month drop since December.
“A 25 basis point cut in U.S. rates in September is priced in as a 50/50 proposition, with a total of 57 basis point cuts priced in through December, so it would take a big surprise to change this pricing,” said Christ Weston, strategist at Pepperstone.
“If U.S. core PCE exceeds 3 percent, it will be effective and the dollar will rise, but if it falls below 2.7 percent, it will give the market a sense of relief,” he said.
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Investors are chasing income amid ongoing interest rate uncertainty, selling low-yielding currencies such as the yen, Chinese yuan and Swiss franc against the euro and dollar.
The Swiss franc has fallen so far this year, hitting its lowest level since April 2023 at 0.9928 francs per euro last week.
The yen may record its first monthly gain this year this month following suspected intervention by Japanese authorities in late April and early May, but has continued to fall since then.
The dollar was steady at 156.88 per dollar on Monday, but found little support from rising Japanese government bond yields, which remain nearly 350 basis points below U.S. Treasury yields on 10-year notes, for example.
Tokyo’s Consumer Price Index (CPI) data, a reliable indicator of national trends, will be closely watched on Friday, while Finance Ministry data, due on Friday, will also shed light on the scale of Japan’s intervention.
The U.S. move to shorten stock market settlement periods to one day from two is another factor to watch in currency trading this week, with dealers predicting it could lead to trading extending into Asia’s quieter early morning hours.
“Asia-based investors now have just hours to aggregate their funding requirements, process trade-related exchange instructions and manage execution,” said Lloyd Rees, global custody product leader for Asia and the Middle East at BNY Mellon.
In the cryptocurrency market, Ethereum recorded its first weekly gain in nearly three years after its U.S. exchange-traded fund (ETF) application was unexpectedly approved.
Further approvals are needed before it can launch, but prices of the second-largest cryptocurrency by market cap rose 25% against the dollar last week and rose another 5% to $3,938 in Asian trading on Monday.
(Reporting by Tom Westbrook and Amanda Cooper; Editing by Lincoln Feast and Mark Potter)
