Dollar decline slows as investors wait on Fed

US dollar rate index news: The dollar dipped against a basket of currencies on Monday after last week suffering its largest weekly decline this year as Treasury yields tumbled, but held above more than one-year lows reached on Friday with no major catalysts to drive market direction. This week is likely to see the dollar consolidate as investors wait on the Federal Reserve’s meeting next week, when the U.S. central bank is expected to hike rates by an additional 25 basis points.

The pace of last week’s dollar decline “seemed unusually large,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, noting that the market should steady and see a firmer dollar this week. This week’s main U.S. economic focus will be the retail sales report for June on Tuesday, though the data is unlikely to sway the path of monetary policy.

Fed funds futures traders are pricing in an additional 32 basis points of tightening with the benchmark rate expected to peak at 5.40 per cent in November. That implies that the market sees a low chance of further interest rate increases after the Fed’s July 25-26 meeting. U.S. Treasury yields fell sharply last week as slowing consumer and producer price inflation in June increased expectations that prices pressures will continue to moderate, and in turn lead to more dovish monetary policy.

"Last week’s U.S. disinflation shock altered the FX landscape, but a few days without key data releases will tell us whether that impulse can keep the dollar on the back foot as the FOMC risk event draws nearer," Francesco Pesole, FX strategist at ING, said. "Euro/dollar appears a bit overstretched in the short term and could face a correction this week," he added.

The dollar index was last down 0.12 per cent at 99.832, after falling to 99.574 on Friday, the lowest since April 2022. The euro gained 0.14 per cent on the day to $1.1242, after earlier reaching $1.12445, the highest since February 2022. The German Bundesbank said on Monday that the euro zone's largest economy may shrink this year by more than the 0.3 per cent decline expected only a few weeks ago, despite a small bounce in the second quarter.

Industry-heavy Germany is bearing the brunt of a drop in global demand for goods - the result of higher borrowing costs dampening investment and people spending more on leisure, travel and other services in the aftermath of the pandemic. Germany's economic output may shrink slightly this year due to the energy price shock and tightening financial conditions, the International Monetary Fund (IMF) said on Monday.

The European Central Bank is also expected to raise interest rates by 25 basis points next week. The dollar dipped 0.07 per cent against the Japanese yen to 138.65, after dropping to 137.245 on Friday, the lowest since May 17. The British pound fell 0.06 per cent to $1.3082, after hitting $1.31440 on Thursday, the highest since April 2022.