Investing.com – The U.S. dollar was modestly weaker in early European trading on Monday, but continued to rise as uncertainty over Federal Reserve interest rate cuts and rising tensions in the Middle East dampened risk appetite.
At 4 a.m. ET (9 p.m. Japan time), the dollar index against a basket of six other currencies was trading 0.1% lower at 105.710, up 1.7% last week but near its highest since early November. . This was the largest weekly increase since September 2022.
Dollar strengthens due to demand for safe assets
The dollar saw some profit-taking early on Monday, but Iran's attack on Israel over the weekend comes as safe-haven assets rise amid fears of an escalation of the broader regional conflict, as well as the war between Israel and Hamas in the Gaza Strip. As demand has increased, demand still remains.
“Markets are taking the view that the Netanyahu government will avoid a more aggressive and escalatory response of direct attacks on Iran's military and nuclear facilities as Western allies call for restraint,” ING analysts said in a note. ”
“However, it is premature to conclude that tensions in the Middle East have found any new equilibrium, and we think the implied volatility in the exchange rate means that conditions may remain better bid for some time,” ING said. added. “This episode also serves as a reminder that the dollar is the best safe-haven currency right now, offering liquidity, high yields, and protection from U.S. energy independence.”
Will the Fed postpone further rate cuts?
The dollar benefited last week from better-than-expected policy announcements, raising expectations that interest rates will need to remain at current levels for an extended period of time to avoid a potential resurgence in inflation.
Investors are currently pricing in a rate cut of just 50 basis points in 2024, down from the 150 basis points they had priced in at the beginning of the year.
Statistics for March are scheduled to be released in the second half, and are expected to rise by 0.4% from the previous month, slowing down from 0.6% in the previous month.
ING added: “Following last week's high US inflation data, it is questionable whether any weakness in today's retail sales data could significantly sway expectations from the Fed this year.”
Euro rebounds from 5-month low
In Europe, the index rose 0.2% to 1.0659, not far from Friday's five-month low of 1.0622.
Dovish comments from many European Central Bank officials point to a rate cut in June, likely before the Fed begins its rate-cutting cycle.
Eurozone inflation is currently slightly above the ECB's medium-term target of 2.0%, but inflation across the eurozone is very weak and well below levels seen across the pond.
The euro zone rose 0.8% month-on-month in February, data released early Monday showed, but that still amounted to a 6.4% annual decline.
The pound rose 0.3% to 1.2487, recovering slightly after suffering its biggest weekly decline since mid-July last week.
This week, UK unemployment figures will be released on Tuesday, followed by the latest consumer prices the following day.
“Conversely, a downward surprise in wages and services data could hit the pound hard, given that the market value of the June central bank rate cut is just 31%,” ING said.
Yen falls to 34-year low
The index rose 0.3% to 153.81, just below the 34-year high seen in early trading.
The yen's weakness has traders wary of possible intervention in the currency market by the Japanese government, after repeated warnings from government officials in recent weeks.
After the People's Bank of China left the medium-term lending rate unchanged, the rate rose slightly to 7.2386 and remained almost at a standstill.
