Euro hits new high as dollar weakens ahead of U.S. inflation report

On Wednesday, the euro briefly hit its highest level against the dollar in seven months ahead of a key U.S. inflation report.

The euro rose to its highest since May 31 at around $1,0776, as investors bet the U.S. Federal Reserve would not have to raise interest rates as high as previously thought. Since hitting a 20-year high in September, the dollar has lost around 12 percent against the euro.

This week, investors are anticipating inflation expectations data, due on Thursday. Nela Richardson of the private payroll firm ADP said the data could provide a positive surprise. The market is also awaiting confirmation that the consumer price index is starting to moderate.

Markets are pricing in a roughly 75 percent chance of a quarter-percentage point increase in June, pushing the Fed's target rate to 4.947 percent. It then dropped to 4.465 percent in December.

Despite the Fed's insistence that it would not cut rates anytime soon, markets are pricing in a reduction of the hikes this year, which could help the dollar's exchange rate. With that alone, the dollar index went up 0.01 percent at 103.26.

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Isabella Rosenberg of Goldman Sachs explained that despite the gains, the euro was still unable to attract inflows due to ongoing concerns about the supply of natural gas.

The price of natural gas dropped to its lowest level in over a year due to a mild winter and a healthy inventory. However, geopolitical risks, such as the conflict in Ukraine, could still affect supplies.

"Unless the global growth backdrop continues to improve more materially, we expect dollar downside to remain constrained," Rosenberg said.

State Street senior global macro strategist Marvin Loh said that the Fed might encounter a battle in the coming months as markets react to the possibility of a rate cut. However, he noted that the central bank might have to keep rates higher than the market expected.

U.S. stock market moves up as dollar weakens

U.S. stocks closed higher on Monday as investors bet the upcoming data would convince the Fed to hold off on increasing interest rates.

The Dow Jones finished at 33,973.1, the S&P 500 gained 1.28 percent, and the tech-heavy Nasdaq Composite added 1.76 percent.

European stocks also closed higher, with the Stoxx 600 gaining 0.38 percent and MSCI and the global stock index rising 1.04 and 0.28 percent, respectively.

On the other hand, U.S. Treasury yields fell. The 10-year note was down eight basis points to 3.530 percent, while the 30-year bond was down 10.5 to 3.6491 percent. The two-year note was down 4.2 to 4.2158 percent.

Despite a surprise build in U.S. crude stocks, oil prices rallied by around three percent as investors focused on the improving global economic outlook. The market also seemed concerned about the impact of sanctions against Russia.

On Monday, West Texas Intermediate crude oil futures settled at around $77.41 per barrel, while Brent crude oil futures ended at $82.67 per barrel. For the fifth straight day, West Texas Intermediate gained about three percent.

Gold prices were flat at $1,876.43 per ounce after hitting an eight-month high of $1,886.59. Copper also rose to $9,000 per tonne thanks to China lifting its COVID-19 restrictions, which boosted demand.