As market participants bet on the Federal Reserve of the United States reducing the size of its interest rate hikes for a second consecutive meeting in February, the dollar started the week testing a new nine-month low.
The “quiet period” for the Federal Reserve begins before its policy meeting on February 1. However, a report published over the weekend in The Wall Street Journal increased confidence that the next move higher will be modest, at 25 basis points as opposed to the 50 basis points seen at the previous meeting.
Despite the continued strength of the labor market, a string of weak economic data was released last week, including sharp declines in retail sales and industrial production, giving the impression that the US economy slowed down significantly at the end of the year.
DXY and Other Currencies
The dollar index, which measures the value of the US currency against a basket of advanced-market currencies, was down 0.34% at 101.515, extending its losses from the previous week. It had now reversed nearly all of its gains since the Fed began raising interest rates last March.
Other currencies’ interest rates are outperforming because those institutions are still playing catch-up. The euro rose 0.5% to $1.0913 following a series of comments from ECB officials at the World Economic Forum insisting that the next rate move will be “significant,” i.e., more than 25 basis points.
The yen also strengthened as markets tested the Bank of Japan’s willingness to defend its long-term bond yield target.
Markets should be relatively quiet on Monday due to the start of China’s Lunar New Year holiday and a lack of market-moving data elsewhere.
However, after their respective nations started discussing the creation of a common currency, the Brazilian real and the Argentine peso will probably be in the spotlight later. In contrast to the peso, the real has recently been a model of stability despite always being volatile.