US dollar weakens against euro, sterling in US holiday trading

THE euro and sterling rose on Monday (Jul 4) against the US dollar in a quiet trading session amid a holiday in the US, while global risk sentiment has improved.

With the US markets closed for Independence Day, markets expected a light trading day, with major currencies gaining some ground against the US dollar, which had climbed to a 2-week high last Friday.

The euro rose 0.3 per cent to US$1.0457, but stayed barely above May’s 5-year trough of US$1.0349 while sterling rose 0.5 per cent to US$1.2155 after hitting a 2-week low of US$1.1976 last Friday.

“Quiet trading to start the week is seeing the US dollar weaken against most major currencies as it unwinds Friday’s gains while ignoring a modest risk-off tone in markets,” said Shaun Osborne, chief FX strategist at Scotiabank.

Reports that the White House will announce an easing of some Chinese tariffs later this week in an attempt to dampen elevated inflation helped inject some optimism back into markets, “giving currencies an extra push against the US dollar”, Osborne added.

The Australian and New Zealand dollars, as well as the Swedish krona, rose on Monday after hitting 2-year lows last Friday.

But amid fears of a global recession, the euro remained near a 5-year low against the safe-haven US dollar.

The war in Ukraine and its economic fallout, in particular soaring food and energy inflation, has been a major drag on the euro, which has weakened 8 per cent against the greenback this year. The difference between the European Central Bank (ECB) and the US Federal Reserve response to higher inflation has also weighed on the euro.

Data last Friday showed eurozone inflation surging to another record, adding to the case for the ECB to raise interest rates this month for the first time in a decade.

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Jeremy Stretch, head of G10 FX strategy at CIBC, said he expected headwinds on the euro to persist as the ECB is set to hike rates on Jul 21 by “a mere 25 basis point”.

“ECB action remains moderate when compared with a 75 bps (basis point) Fed hike,” he said. “Beyond ECB monetary policy discussion, the primary European Union risk variable relates to the energy sector.”

Safe-haven demand has kept the US dollar elevated even if markets have scaled back some of their US rate hike expectations. The market is pricing in around an 85 per cent chance of another hike of 75 bps this month and rates at 3.25 per cent to 3.5 per cent by year end — before cuts in 2023.

The US dollar index eased 0.15 per cent to 104.9, not far below last month’s 2-decade high of 105.790.

Looking ahead to the rest of the week, investors are awaiting publication of minutes from last month’s Fed meeting on Wednesday and US employment data on Friday.

Australia’s central bank will meet on Tuesday and markets have priced in a 40 bps rise in interest rates. The Aussie may not catch much of a boost if a hike of that size, or thereabouts, is delivered. REUTERS