Euro at 1-week High, Rowback in Fed Rate Hike Bets Knocks Dollar

By Reuters
July 18, 2022 Updated: July 18, 2022

LONDON—The euro firmed to a one-week high on Monday, benefiting from the dollar’s retreat after several Federal Reserve officials signaled they did not favor stepping up the rate hiking pace.

The comments late last week knocked the dollar off two-decade highs and boosted global stocks and non-dollar currencies, especially the euro.

The greenback index, measuring its rate against six global currencies, is now almost 2 percent off last week’s peak and by 1030 GMT, stood 0.5 percent lower at 107.27.

The euro, the main component in that index, firmed 0.7 percent at $1.016, having plunged last week below parity to the dollar.

“With equity markets still in positive territory, risk appetite is back so the comments from Fed governor (Christopher) Waller, ramming back on the 100 bps rise, have had the desired impact,” 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 increase at the Fed’s July 26–27 meeting, rather than the 100 bps move some had penciled in following an above-forecast inflation reading.

After the comments, futures tied to the short-term federal funds policy rate firmly price a 75 bps hike.

Speculators remain bullish on the dollar, however, with weekly U.S. CFTC data showing aggregate dollar long positions at a seven-week highs, while euro and yen short positions grew.

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

The European Central Bank is expected to raise rates by 25 bps on Thursday and investors are waiting to see if it outlines plans to deal with rising bond yields in southern euro bloc states, especially Italy.

On the same day, Russia is meant to resume gas supply via the Nord Stream pipeline after a 10-day maintenance shutdown and failure to do so will spook markets, already fearing economic recession in the European Union.

“With Nord Stream and the political situation in Italy, there is no compelling fundamental reason for a turnaround in euro/dollar,” Halpenny said, contrasting the expected 25 bps ECB move with the 75 bps expected from the Fed.

In Italy, investors are watching 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.

Inflation Elsewhere

Meanwhile, other central banks are upping the rate-hiking pace, with Canada delivering a 100 bps increase last week. New Zealand’s three-decade high inflation print on Monday fuelled speculation of a bigger 75 bps move.

That lifted the kiwi dollar to a 10-day high against the greenback of $0.62, up 0.4 percent. The Australian dollar touched a one-week high, rising 0.7 percent.

Commodity currencies also got a boost after Chinese authorities flagged support for the property sector, lifting iron ore and copper prices

Offshore-traded yuan firmed 0.5 percent at 6.74 per dollar.

By Sujata Rao