Dollar licks wounds as policy peak looms

By Tom Westbrook

SYDNEY (Reuters) – A bruised dollar took respite on Monday after suffering its worst weekly drop of the year, as traders waited on economic data and policy decisions before selling it down any further.

The euro, which jumped 2.4% last week to a 16-month high, held just below that peak at $1.1223. The yen, also up 2.4% last week, held at 138.56 per dollar.

Chinese growth data landed a little above low expectations on Monday, but without sparking much currency market response as traders had already priced in a sluggish quarter and are waiting to see if the government steps up stimulus to promote spending.

The Australian and New Zealand dollars pulled back slightly, with the last at $0.6821 – off last week’s peak of $0.6895 – and the down 0.2% at $0.6355 after hitting a five-month high of $0.6412 on Friday.

“The data suggests that China’s post-COVID boom is clearly over,” said Commonwealth Bank of Australia (OTC:) strategist Carol Kong. “But markets already had low expectations, and reaction from here is fairly limited.”

Last week’s dollar slide began with yen buying, as investors unwound yen-funded positions in emerging markets, but extended sharply after softer-than-expected U.S. inflation data leant support to wagers that U.S. interest rates will soon peak.

Hikes are expected from the Federal Reserve and European Central Bank next week, but beyond that market pricing implies the Fed will likely stop, before cuts next year, while in Europe another hike probably beckons.

“The FX market is front running possible normalisation of Fed policy in 2024,” said Chris Weston, head of research at broker Pepperstone in Melbourne.

“The question then is whether the dollar sell-off has gone too far and we are at risk of mean reversion early this week.”

The dropped 2.2% last week, its sharpest one-week fall since November, and was steady at 99.936 in the Asia session.

Sharp (OTC:) gains in the yen have slowed as traders weigh whether the ultra-dovish Bank of Japan is really likely to make any shifts at its policy meeting next week, given rhetoric suggests they are in no hurry.

The Swedish and Norwegian crowns made gains of more than 5% on the dollar last week, and have paused for breath. At $1.3086 sterling was parked just below last week’s 15-month peak.

“The dollar may remain on the backfoot as the market re-positions itself for a less hawkish Fed,” said Rabobank’s head of FX strategy, Jane Foley.

“That said, the outlook for the latter few months of the year is less clear cut,” she said.

“By then other major central banks including the ECB will also likely have reached their peak policy rates … interest rate dynamics may therefore swing back in favour of the dollar.”

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