Early European trade on Monday saw the U.S. dollar linger near two-month lows as weak economic data support the notion that the U.S. Federal Reserve may be nearing the end of its rate-hiking cycle.

The Dollar Index, which measures the value of the dollar against a basket of six other currencies, crept slightly higher at 101.295 at 02:55 ET (06:55 GMT), barely above a new two-month low of 101.140 set earlier in the session.

The idea that persistent inflation will force the Federal Reserve to raise interest rates than initially anticipated gave the dollar a solid start last month.

These hopes were dampened by the failure of two regional U.S. banks in March, and weak economic indicators have only strengthened the view that the U.S. central bank may soon decide to cease raising interest rates, which would be a move that would be dollar-bearish.

According to data released on Tuesday, the number of job openings in the United States fell to its lowest level in almost two years in February. On Monday, the Institute of Supply Management reported that the manufacturing purchasing managers index fell to a 21-month low in February.

As the federal funds rate rose above 5% on Tuesday, Federal Reserve Bank of Cleveland President Loretta Mester said that the institution likely had more rate increases in store.

Nevertheless, given that the Fed increased rates by a quarter of a percentage point in March, to somewhere between 4.75% and 5%, this might only mean one more hike of 25 basis points before the Fed decides to pause.

Robert Holzmann, a member of the Governing Council, said earlier this week that a 50 basis point increase by the European Central Bank is „still in the cards“ for early May.

According to analysts at ING, this „serves as a reminder that the ECB lags the Fed in its tightening cycle and that the ECB will be much slower to loosen policy.“

As a result of strong growth in the car construction industry and a 4.8% increase in German industrial orders in February, the EUR/USD traded 0.1% down at 1.0948, slightly below the two-month high it reached on Tuesday.

“Overall, we anticipate that due to worries over the local US financial sector, the market will be hesitant to chase the EUR/USD above 1.10 just yet. But, a higher EUR/USD rate likely to be the trend for the remainder of the year, according to ING.

GBP/USD dropped from Tuesday’s ten-month high of 1.2487 to 1.2487, AUD/USD dropped from 0.6727 to 0.6727, and USD/JPY dropped from 131.56 to 131.56 as data revealed that Japan’s service sector expanded faster than anticipated in March, mainly offsetting a decline in industrial output.

The Reserve Bank of New Zealand increased its benchmark interest rate by a larger-than-expected 50 basis points and signaled additional action to combat excessive inflation, sending the NZD/USD up 0.6% to 0.6348.

 

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