US dollar trims gains as markets weigh impact of Opec+ cuts

THE US dollar trimmed its initial gains against major pairs in the course of Monday (Apr 3) as investors focused on diverging central bank policy, with the impact of oil production cuts complicating the inflation outlook.

An announcement on Sunday of output target cuts by the Organization of the Petroleum Exporting Countries (Opec) and its allies, known as Opec+, caused oil prices to jump by around 8 per cent in early trade in Asia on Monday. Brent crude was last trading at US$84 per barrel, up US$4.10 or 5.1 per cent.

Opec+ had been expected at a meeting on Sunday to stick to cuts of 2 million barrels per day (bpd) already in place until the end of 2023, but instead announced further output cuts of around 1.16 million bpd.

“A higher oil price will put pressure on global inflation, and if we assume the banking turmoil continues to reside, then the markets will increasingly focus on the inflation outlook,” said Mohamad Al-Saraf, associate for FX and rates strategy at Danske Bank.

The US dollar, which had jumped on the surprise cut to output, slowly reversed course through the European morning to trade lower as attention turned back to central bank policy.

Data released on Friday showed an acceleration in core price growth in the euro area, which analysts said should strengthen the case for more rate hikes from the European Central Bank (ECB), while a measure of core inflation in the US came in a shade lower than expected at 4.6 per cent.

“Interest rate differentials are the main driver for euro-US dollar,” said Niels Christensen, chief analyst at Nordea.

“It was a surprise to see the euro lower this morning, because data released last week should be supportive of more rate hikes from the ECB,” Christensen added.

Traders are pricing in around 60 basis points (bps) of further tightening from the ECB by the end of the year. In contrast, markets priced in around 15 bps of tightening from the Fed, with 40 bps of rate cuts by December.

The euro was last up 0.2 per cent to US$1.0865, after touching a one-week low of US$1.0788 earlier in the session.

The US dollar index, which measures the currency against a basket of six currencies including the euro, was down 0.4 per cent at 102.49.

Focus this week will be on US activity data and Friday’s jobs report, although many markets will be closed for the Easter holiday.

“If we get firm data from the US, the markets may have to revise its rate hike expectations and the US dollar may get some support,” Nordea’s Christensen added.

The US dollar rose 0.3 per cent to 133.23 Japanese yen, after earlier hitting its highest level since Mar 17.

Sterling was at US$1.2357, up 0.2 per cent on the day, while the US dollar rose 0.1 per cent against the Swiss franc.

Oil-sensitive currencies, such as Norway’s krone and the Canadian dollar, were beneficiaries of the rising oil prices.

The risk-sensitive Australian dollar was last up 0.6 per cent to US$0.6724, ahead of a policy meeting at the Reserve Bank of Australia on Tuesday, with markets placing around an 85 per cent chance that the central bank would stand pat on interest rates after 10 rate hikes.

In cryptocurrencies, Bitcoin was up 0.6 per cent at US$28,340. Ethereum rose 0.5 per cent to US$1,805. REUTERS