Dollar Weakens Ahead of Fed Meeting; Risk Sentiment Climbs

© Reuters

By Peter Nurse

Investing.com – The dollar weakened in early European trading Monday, with risk sentiment on the rise as economic data point to a global economic recovery ahead of this week’s Federal Reserve meeting.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was 0.1% lower at 90.778, near levels not seen since the end of February. 

USD/JPY was 0.1% lower at 107.81, EUR/USD traded up 0.1% at 1.2100, near a two-month high, GBP/USD gained 0.3% to 1.3914, while the risk-sensitive AUD/USD rose 0.3% to 0.7769.

Risk appetite has been boosted of late by strong signs of a global economic improvement, to the detriment of the safe haven dollar, with early April manufacturing activity indicators, released late last week, hitting record highs in the United States and also showing impressive improvement in Europe.

A survey from Germany’s Ifo institute due later on Monday is expected to show business conditions continued to improve in Europe’s largest economy.

Attention this week will be centered around the latest policy-setting meeting of the Federal Reserve, with the two-day get together scheduled to finish on Wednesday.

The European Central Bank maintained its very accommodative policies last week, with President Christine Lagarde shutting down expectations that the central bank will start to consider easing back its bond purchases any time soon.

Federal Reserve Chairman Jerome Powell is likely to face questions over whether an improving labor market and rising coronavirus vaccinations warrant a withdrawal of monetary easing, but he is likely to take a very similar stance to Lagarde, shunning talk of tapering bond purchases.

“The Fed is unlikely to rock the tapering boat on Wednesday,” said analysts at Nordea, in a note, but “we keep leaning towards higher USD rates, a stronger USD and negative spill-overs to risk assets during Q3. We think a decision on tapering will be taken in September and keep looking for a rate hike from the Fed already in H1-2022.”

Elsewhere, USD/TRY gained 0.9% to 8.4471, with traders keeping a wary eye on the Turkish lira to see if this pair will test its all-time high of 8.58 amid deteriorating relations with the United States, and after the new central bank chief signaled that rate hikes would harm the economy.

The lira has slipped 3.5% in the last three trading days amid reports that U.S. President Joe Biden will recognize the 1915 massacres of Armenians in the Ottoman Empire as a genocide, something that would strain the relationship between the NATO allies.

USD/RUB fell 0.3% to 74.794, as Russia de-escalates the tension on the border with Ukraine and after the country’s central bank hiked its key interest rate to 5% Friday, from 4.5%, in an attempt to stem accelerating inflation.