The U.S. dollar rallied on Monday following an increase in factory activity in New York state for the first time in five months.
The dollar index, DXY, gained 0.413 percent after mostly trading flat earlier in the day. After hitting a one-year high of $1.108 on Friday, the euro plunged 0.66 percent to $1.0926. The market currently expects more interest rate hikes from the European Central Bank since the banking crisis has subsided.
The sterling also fell 0.31 percent during the session, trading at around $1.2374. The currency hit a 10-month high of $1.255 last week. The British government will publish a series of new economic data this week, which analysts said would influence the sterling's movement in the forex market in the coming days.
The Japanese yen traded at 134.40 per dollar, down 0.45 percent. Rabobank head of FX strategy Jane Foley said the Bank of Japan's confirmation about maintaining its loose monetary policy contributed to the decline significantly.
The Canadian dollar saw a 0.25 percent drop to 1.34 against the greenback. Analysts said the higher expectations of further tightening by the Federal Reserve created pressures on the Canadian currency. Canada is a major commodity producer, and higher interest rates in the U.S. may dampen demand for commodities.
In the same session, the Mexican peso lost 0.11 percent to trade at 18.04 versus the dollar. The currency hit its highest level in almost five years against the dollar last month.
The strong factory activity in New York state in April helped boost the U.S. dollar in the market. The Empire State Manufacturing index jumped to 10.8 from -24.6 the month before, well above the earlier estimates of -18. The New York Fed reported that the new orders index gained 47 points to 25.1, while the shipments index increased by 37 points to 23.9.
"It's the best reading since last July with a big jump in orders and has taken the dollar higher on this," Marc Chandler, chief market strategist at New York's Bannockburn Global Forex, said.
According to Chandler, the U.S. economy is still "growing above what the Fed says is its speed limit." The strategist added that the market underestimated the chances of another benchmark rate hike after May.
"Now the market says the Fed is going to cut later, but I think that the economy is showing itself to be resilient."
Marc Chandler, Chief Market Strategist at Bannockburn Global Forex
Futures tied to the Fed's rate policy now forecast an 88.7 percent probability that the central bank will raise the interest rate to the range of 5.00 to 5.25 percent next month, up from the 78 percent chance projected on Friday.
Fed funds futures also shows that the market expects the Fed to start cutting rates in November, later than the earlier prediction of September. A smaller cut is also highly likely, given the economic resilience, as noted by analysts.
Economists previously predicted that the dollar would be on a downside trajectory if the Fed decided to pause interest rate hikes. The prediction came after the high-profile collapse of two regional lenders last month, which caused turbulence in the entire banking sector. Analysts said Fed's tight monetary policy partially caused the banking stress.
Fed's battle against inflation
The Fed began its monetary tightening cycle in March 2022 to bring down inflation to the target rate of two percent. Fed officials, including Chairman Jerome Powell, have repeatedly emphasized the importance of stabilizing prices to justify the rate policy.
The U.S. consumer price index fell to the lowest level in nearly two years last month. However, analysts pointed out that underlying prices remained high. Core prices, which exclude volatile food and energy costs, grew by 5.6 percent year-over-year.
Fed governor Christopher Waller said the growth in core prices remained around the same pace for over a year, indicating the need for further interest rate hikes.