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The dollar maintained its position on Monday, despite being on track for its first monthly loss this year. This pause comes as investors keenly await inflation data from the U.S., Europe, and Japan, which will shape the global interest rate outlook.
In recent months, foreign exchange trading has been driven by the pursuit of “carry” trades, favoring higher-yielding currencies and putting pressure on low-yielders like the yen, yuan, and Swiss franc. This trend has supported the dollar, even as mixed U.S. economic data has clouded the Federal Reserve’s rate policy direction.
Several major currency pairs have remained within narrow ranges. The euro, which gained against the dollar last week, hovered around $1.085, a level it has maintained for over a year. Despite a worse-than-expected German business confidence survey, the euro saw little movement on Monday.
Trading activity was subdued due to holidays in Britain and the United States. However, traders are eagerly anticipating German inflation data on Wednesday and eurozone readings on Friday, which could confirm expectations of a European rate cut next week.
Sterling tested the upper end of its range for the year at $1.2735, while the U.S. core personal consumption expenditures price index, a key inflation measure for the Federal Reserve, is expected to remain steady month-on-month.
While the dollar index, which tracks the U.S. currency against a basket of six others, dipped slightly, it’s still poised for a 1.5% decline in May, its largest monthly drop since December.
Carry Trade Drives Currency Markets
The prevailing uncertainty surrounding interest rates has fueled the pursuit of “carry” trades, with investors selling low-yield currencies like the yen, yuan, and Swiss franc in favor of higher-yielding alternatives like the euro and dollar.
The Swiss franc has experienced a year-long decline, hitting its lowest level against the euro since April 2023 last week. The yen, despite potential gains this month due to suspected intervention by Japanese authorities, has also been weakening.
Market participants are closely watching Tokyo CPI data due Friday, as well as finance ministry data on the extent of Japan’s intervention.
Crypto Markets React to ETF Approval
In the cryptocurrency realm, ether celebrated its most significant weekly gain in nearly three years following the surprise approval of some U.S. exchange-traded fund (ETF) applications. While further approvals are needed before launch, the price of ether surged 25% against the dollar last week and continued its upward trajectory with a 5% rise in Asia trade on Monday.
Overall, the forex market remains fixated on upcoming inflation data, with the potential for significant shifts in currency valuations depending on the outcomes. Meanwhile, the “carry” trade continues to be a dominant force, shaping investor behavior and driving currency flows.
