U.S. dollar strengthens slightly ahead of rate-setting meetings

The U.S. dollar rose slightly on Sunday ahead of a series of central bank rate-setting meetings this week. However, analysts said dovish expectations on interest rate hikes kept the greenback from rising.

The DXY — an index that tracks the dollar's performance against several other currencies — strengthened by 0.03 percent to 101.92. Last week, the index hit an eight-month low of 101.50.

Sterling rose by 0.04 percent to trade at $1.2405. During the same period, the euro gained 0.06 percent and traded at $1.0874.

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Due to heightened expectations that the Federal Reserve will end its monetary tightening cycle shortly, the greenback is on track to post a fourth consecutive monthly loss at over 1.5 percent this January.

Investors are generally united about the Fed raising interest rates by 25 basis points in the upcoming rate-setting meeting. The American central bank hiked the benchmark rates by 75 basis points in the last four policy meetings.

On the other hand, the European Central Bank (ECB) and the Bank of England (BoE) are expected to maintain their hawkish policy. Analysts predict that both central banks will increase their benchmark rates by 50 basis points.

As a result, the euro is on track to gain almost 1.5 percent this month. In addition to the significant interest hikes, analysts said Europeans were less concerned about a deep recession.

Regardless, analysts said the ECB and BoE's respective meetings would influence the movement of the euro and sterling in the coming days.

"We will range trade a little bit as the market tries to assess how the central banks behave... I think, for all three it's going to be more about what they say than what they do," National Australia Bank currency strategist Rodrigo Catril said.

New Zealand's dollar fell by 0.05 percent to $0.6491. Meanwhile, the Australian dollar fell by 0.3 percent to $0.7088 due to the latest inflation data, which show Australia hitting the 33-year high in the Q4 of 2022. Despite that, the Australian dollar remains on track for a nearly four percent gain this month.

The Japanese yen, which has recently rallied, rose nearly 0.2 percent to 129.62 a dollar. On the same day, a panel of economists and company executives in Japan urged the country's central bank to make its two percent inflation target a long-term goal.

Since the Bank of Japan aims to reach its inflation target quickly yet is adamant about not raising its interest rates, analysts have become increasingly concerned about the costs needed to maintain the lax policy.

The Chinese onshore yuan also rose 0.5 percent to 6.7530 a dollar as consumer spending and tourism data indicated signs of economic recovery. Chinese investors are now turning their attention to the purchasing managers' index (PMI) data due on Tuesday local time.

"So far, the data coming from China, or the vibes coming from China, do play to the view that a good reopening in terms of activity is likely to unfold," Catril said.

U.S. economic outlook

According to housing data, residential construction has declined in the past six months due to high-interest rates. Over the past three months, economic data also showed that industrial production has been falling.

During the holiday season, in November and December, retail sales also posted at least a one percent decrease.

Many business executives reported that they were looking to cut operational costs this year instead of focusing on revenue increases. This finding aligns with the recent job market report, which signals falling employment numbers over the past six months.

Analysts predict that the rate-setting meeting in March will likely be the last interest rate hike in this cycle.