Euro at 1-week high, Fed rate hike bets hit dollar

US dollar and euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

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LONDON, July 18 (Reuters) – The euro strengthened to a one-week high on Monday, benefiting from a weaker dollar after several Federal Reserve officials signaled they were not in favor of a acceleration of rate hikes.

Comments late last week sent the dollar down to its highest level in two decades and boosted global equities and non-dollar currencies, particularly the euro. The mood was also largely helped by signals of support for China’s recovery.

The greenback index, measuring its rate against six global currencies, is now nearly 2% off last week’s peak and as of 10:30 GMT was down 0.5% to 107.27.

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The euro, the main component of this index, strengthened by 0.7% to $ 1.016, after having plunged last week below parity with the dollar.

“With stock markets still in positive territory, risk appetite is back, so Fed Governor (Christopher) Waller’s comments reversing the 100 basis point rise had the impact desired,” said Derek Halpenny, head of research at MUFG.

Waller and St Louis Fed Governor James Bullard said they preferred a 75 basis point interest rate hike at the July 26-27 Fed meeting, rather than the move to 100 basis points some had expected following a higher than expected inflation reading.

After the comments, futures linked to the short-term federal funds rate are firmly forecast for a 75 basis point hike.

Speculators remain bullish on the dollar, however, with weekly data from the US CFTC showing overall long positions in the dollar at seven-week highs, while short positions in the euro and yen rose.

euro positions and flight

Halpenny highlighted “a whole list of risks” for the euro.

The European Central Bank is expected to hike rates by 25 basis points on Thursday and investors are waiting to see if it outlines any plans to deal with rising bond yields in southern euro states, particularly Italy.

On the same day, Russia is expected to resume gas supplies via the Nord Stream pipeline after a 10-day maintenance shutdown and failure to do so will spook markets amid fears of an economic downturn in the European Union.

“With Nord Stream and the political situation in Italy, there is no compelling fundamental reason for a euro/dollar reversal,” Halpenny said, contrasting the ECB’s expected 25bp move to the 75bp move. base expected from the Fed.

In Italy, investors are waiting to see the fate of Prime Minister Mario Draghi who will address parliament this week after his resignation was rejected by the country’s president. Read more

INFLATION ELSEWHERE

Meanwhile, other central banks are accelerating the pace of rate hikes, with Canada seeing a 100 basis point hike last week. New Zealand’s three-decade high inflation print on Monday fueled speculation of a larger 75 basis point move.

This took the Kiwi Dollar to a 10-day high against the Greenback of $0.62, up 0.4%. The Australian dollar hit a one-week high, rising 0.7%.

Commodity currencies also got a boost after Chinese authorities announced support for the real estate sector, boosting iron ore and copper prices, read more

The overseas-traded yuan strengthened 0.5% to 6.74 to the dollar.

China’s central bank may also offer a long-awaited policy easing on Wednesday.

“The situation in China has probably deteriorated. We have had crackdowns in e-commerce, education and gaming. The zero-COVID approach to fighting epidemics has not allowed it to reopen similarly in the West,” Bill Maldonado, CIO of Eastspring Investments, said.

“They’re only now starting to add stimulus to the economy.”

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Additional reporting by Rae Wee and Tom Westbrook in Singapore, editing by Mark Heinrich and Angus MacSwan

Our standards: The Thomson Reuters Trust Principles.

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