The greenback weakened on Monday following a rally in the previous session. Regardless, it continued to trade around its one-month high as investors predicted that the Federal Reserve would increase interest rates further to further cool down inflation.
The U.S. dollar index dropped slightly to 103.47, falling by 0.13 percent. In the previous trading session, the index hit its one-month peak of 103.76 after a rally that followed an upbeat U.S. payroll report last week.
Sterling rose 0.2 percent to $1.2046 after reaching a one-month low of $1.2006 in the prior session. The euro also gained 0.08 to trade at $1.0735. The currency previously slid to $1.0709, its lowest point since January 9.
New Zealand's dollar increased by 0.29 percent to $0.6323 after trading at $0.6271 the day before. The Australian dollar also surged by one percent, reaching an intraday high of $0.6952.
Analysts noted that the sharp increase in the Australian dollar followed a 25-basis-points rate increase implemented by the Reserve Bank of Australia (RBA). The Australian central bank also said there would likely be more increases in the coming months, against the earlier prediction that the RBA would loosen its policy.
"By stating that, in its view, inflation will stay high for a protracted period, the RBA is undermining any thoughts of easing later this year or early next."
Rob Carnell, Head of Research in Asia-Pacific at ING
ING head of research in Asia-Pacific, Rob Carnell, said the RBA's statement showed that the bank expected inflation to remain high in the foreseeable future. Carnell predicted that RBA's hawkish tone would cause an increase in longer-term bond yields. He added that the Australian dollar would see a further surge in the coming days.
In Asia, the Japanese yen performed better, trading at 132.26 per dollar or gaining 0.3 percent. The currency, however, remained close to its one-month low of 132.90 per dollar in the previous trading session.
Japan reported a real wage increase in December for the first time in nine months. Experts said it was difficult to predict whether wage inflation would persist as the country began its economic recovery.
Since the Bank of Japan governor Haruhiko Kuroda's tenure will end in April, the government is currently looking for his successor. The BoJ's current deputy governor, Masayoshi Amamiya, is expected to take over the position. Amamiya is notorious for his inclination toward a dovish policy approach.
However, CMC market analyst Tina Teng said while investors expected the BoJ to reverse its yield curve control policy once Kuroda stepped down, the central bank would likely maintain the existing policy due to recessionary risks.
Meanwhile, in the U.S., investors reversed their expectations of a policy pivot by the Fed following a stronger-than-expected employment rate. The report showed that the nonfarm sector added 517,000 jobs last month, indicating a robust labor market.
Teng said while the employment rate was not a key indicator of the Fed's monetary policy, the upbeat data would still significantly affect the bank's action in the near future. If the market maintained the expectations of a hawkish policy by the central bank, the greenback would rally in the risk-averse environment.
Bond yields fall
The two-year Treasury bond yields — which provide insights about the market's expectations — fell slightly to 4.4267 percent on Monday after achieving its one-month high of 4.4930 the day before.
Meanwhile, the 10-year bond yields also fell to 3.6192 after achieving a month-peak of 3.6550 percent the previous day. The falling bond yields signaled that investors were avoiding high-risk assets.
Futures pricing indicated that markets expected the Fed funds rate to hit a peak rate of over 5.1 percent by June 2023. Before the publication of the job report, it was predicted that the rate would peak at less than five percent.