Dollar licks wounds as China data looms

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.

Chinese growth data and loan-rate settings are due later in the session, ahead of U.S. retail sales and British inflation later in the week and a slew of central bank meetings next week.

The euro, which jumped 2.4 per cent last week to a 16-month high, held just below that peak at $1.1228. The yen, also up 2.4 per cent last week, held at 138.69 per dollar.

The dollar's 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 lent 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 cutting next year, while in Europe another hike probably beckons.

"The FX market is front-running a 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 U.S. dollar index dropped 2.2 per cent last week, its sharpest one-week fall since November, and was steady at 99.956 early in the Asia session on Monday.

The Australian dollar has come back from last week's top of $0.6895 to trade at $0.6830 on Monday and likewise, at $0.6364 the New Zealand dollar was below Friday's five-month peak of $0.6412.

The Antipodeans could face pressure if Chinese data disappoints. Elsewhere the dollar moves have been so large that a short-term breather may be in order.

Sharp 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 per cent on the dollar last week. At $1.3089, sterling was parked just below last week's 15-month peak.

"The dollar may remain on the back foot 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."