The U.S. dollar strengthened versus the euro and the pound on Monday after falling to a multi-month high as traders said the market overreacted to a minor miss on U.S. inflation and prospects of a less aggressive Federal Reserve interest rate hike faded.
After statistics revealed that U.S. consumer prices climbed less than anticipated in October, increasing wagers that the Fed would cut down its significant interest rate hikes, the dollar index dropped 4% last week, marking its worst week in more than two and a half years.
Governor Christopher Waller warned on Sunday that the inflation print was “only one data point” and that additional readings of a similar nature would be required to conclusively demonstrate a decrease of inflation.
However, Waller did add that the Fed might now begin considering hiking at a slower rate.
At 1130 GMT, the euro was trading at $1.0284, down 0.6% from its three-month peak reached during Asian trading hours.
“I believe that markets are now more realistic. After the recent pushback from senior Fed officials and last week’s aggressive repricing, particularly in European FX, traders appear to be prioritising re-engaging in some U.S. dollar length “said Simon Harvey, Monex’s Head of FX Analysis.
Despite efforts to support euro zone rates by ECB (European Central Bank) officials, he continued, “We think euro/dollar downside has further to run.”
The Dollar Index
The dollar index, which compares the value of the US dollar to a basket of six other important currencies such as the euro, yen, and sterling, increased by 0.4% to 107.14.
After the collapse of cryptocurrency exchange FTX, continuous unrest continued to put pressure on cryptocurrencies. According to price website Coingecko, the Cronos token from Crypto.com has dropped in value by halving over the past week to $0.06, while FTX’s token was only worth $1.3, down 94% from its value in November.
Early on Monday, Bitcoin fell down below $16,000 before climbing back up to trade at $16,779, up 2.9% for the day.
In response to Beijing’s decision to end the yuan’s ten-year peg to the dollar, the central bank increased its official guidance fixing by the most since 2005, sending the onshore Chinese currency to a nearly two-month high.
Fabio Panetta, a member of the ECB board, stated on Monday that the institution must continue raising rates while taking care to prevent overtightening, which could destroy productive capacity and exacerbate an economic downturn.
The official measures to support the struggling real estate market and the government’s decision to relax some of the strict COVID-19 restrictions caused a general uptick in market sentiment on the Chinese mainland, which coincided with the yuan’s rally.
In other news, the Japanese yen dropped 1.1% against the dollar to 140.37 per dollar.