On Monday, as European Central Bank policymakers argued for more aggressive monetary tightening, the euro surged to a more than three-week high against the dollar and sterling increased to its highest level this month.
In anticipation of important U.S. inflation figures this week that could give the Federal Reserve flexibility to delay the pace of hikes at its policy meeting on September 21, the dollar remained close to a two-week trough against a basket of peers.
Early in the Asian session, the euro soared as high as $1.0130 before closing the session 0.32% higher than on Friday, at $1.0079.
Sterling increased to $1.1681 before closing up 0.23% at $1.1610.
According to insiders, the ECB policymakers are increasingly concerned that they would need to increase their benchmark interest rates to 2% or more to stop the euro zone’s record inflation.
Joachim Nagel, president of the Bundesbank, stated in an interview with German media over the weekend that additional decisive actions must be taken if the situation regarding consumer prices doesn’t change.
The dollar index, which compares the value of the dollar to six important rival currencies, stayed relatively stable at 108.78, retreating from a two-decade high of 110.79 achieved on Wednesday. In the previous session, it fell to 108.35, its lowest level since August 30.
Investors remain cautious ahead of Tuesday’s release of the US CPI report, even though Fed officials continued to use hawkish language on Friday, the last day before a period of silence prior to the Federal Open-Market Committee’s meetings.
Governor of the Fed Christopher Waller endorsed a large rise at their next meeting, and James Bullard of the St. Louis Fed maintained his proposal for a 75-basis point increase.
Commonwealth Bank of Australia analyst Joseph Capurso in a client note, mentioned officials have made it clear that the FOMC must maintain rising interest rates unless there is strong evidence that inflation is declining.
The FOMC, in their opinion, still has a lot of work to do, regardless of the CPI report’s conclusion, which bodes well for the dollar’s short- and medium-term prospects.
In contrast, the dollar gained 0.36 percent to 143.215 yens against the sharp and rate-sensitive yen, moving back toward a 24-year peak from Wednesday at 144.99.
That occurred while the benchmark 10-year Treasury yield, which even the currency pair frequently tracks closely, was trading in Tokyo at around 3.315%, not far from last week’s approximately three high of 3.365%.
Over the weekend, Japanese government officials again suggested that they would step in. A senior government representative said in an interview with a local television station that the administration should take the necessary action to stop the excessive decreases in the value of the yen.
Analysts, however, question whether intervention would be effective in the absence of support from the Fed as well as other central banks gave that the Bank of Japan is the only developed market that is actively pursuing stimulus.
Since major central banks are currently fighting inflation with tighter monetary policy, worldwide government support for the JPY appears doubtful. In a note, National Australia Bank strategist Rodrigo Catril wrote.
He continued by saying that the BOJ must alter its ultra-easy policy if it truly intends to reverse the JPY’s slide. The strain for response is increasing.
The New Zealand dollar moved 0.07% down to $0.6099, while the Australian dollar fell 0.23% to $0.6831.
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