The dollar faltered in early Asian trading on Monday, reflecting a cautious investor mood ahead of key policy meetings that could influence rate hike expectations globally.
The greenback's ascent has been hesitant and uneven, mirroring market confusion about the timing of potential Federal Reserve interest rate cuts. The upcoming central bank meetings in Japan and Europe also put the brakes on its recent advancement. As of writing, the dollar's trade-weighted index (.DXY) was down 0.13 percent at 103.16.
Last week's U.S. economic data remained resilient despite record-level high interest rates, but it caused markets to scale back speculation of near-term Fed rate cuts. Recent hawkish comments from San Francisco Fed President Mary Daly also reinforced the view that rate cuts remain distant despite strong data.
Per the CME FedWatch Tool, the market's anticipation for a rate cut at the March meeting has plummeted to 49.3 percent, compared to 81 percent just a week prior. Meanwhile, short-term interest rate futures traders are now pricing a later start to potential Fed rate cuts compared to earlier forecasts, around May.
Market expectations are likely to persist until later this week, according to Chris Weston, head of research at online broker Pepperstone. The key inflection point will be the release of the Fed's preferred inflation gauge, the core personal consumption expenditures (PCE) price index.
"The USD holds a fair relationship with the evolving implied pricing for a March Fed cut, where rate cut probability falls the USD rallies, and vice versa," Weston wrote.
While the dollar took a breather, U.S. Treasury yields and stocks edged higher in early Monday trading. The S&P 500 stepped into a bull market on Friday, reaching a record closing high for the first time in two years. Chipmakers and other heavyweight technology stocks surged fueled by bullish sentiment surrounding artificial intelligence.
Gold prices also saw a marginal increase, with spot gold trading at $2,030.87 per ounce. The modest rise came after a recent dip over the past week, following hawkish commentary from Fed officials highlighting the need for further inflation data before crafting rate policy. As a traditional inflation hedge, gold often gains favor when investors seek safe havens against rising price pressures and potential currency weakness.
Dollar's performance against other currencies
The euro edged higher against a subdued dollar early Monday, posting modest gains just below the 1.0900 barrier at $1.0898.
Investors are closely watching the European Central Bank's first 2024 policy meeting on Thursday, as the governing council continues to tread cautiously on monetary policy. They will also take more cues from ECB President Christine Lagarde's speech following Thursday's meeting.
While no changes are expected, the ECB's stance on future easing will be closely scrutinized for clues about the trajectory of eurozone rates. Investors expect the ECB to start cutting rates in spring, fueled by sustained progress towards the two percent inflation target.
Sterling rose 0.15 percent to 1.2719 after dipping at the end of last week following the release of the U.K.'s latest retail sales data. The data, showing a dramatic slowdown in sales growth, fueled concerns about a potential drop-off in economic activity that could tip the U.K. into recession later this year.
The Japanese yen emerged as the standout mover, edging higher after touching a one-month low of 148.80 on Friday. However, this did not last long as it plunged to 147.94 as of writing. The currency, after a brief resurgence late last year, remains the worst performer against the dollar in 2024, down roughly five percent amid renewed weakness.
As the Bank of Japan convenes its two-day policy meeting starting Monday, market expectations for immediate action have dimmed. The recent earthquake in western Japan and dovish signals from central bank officials have tempered speculation about exiting its negative rates.