The dollar started the week on a pessimistic note and stock markets rose with traders pricing in the narrowing of the policy divergence between the US Federal Reserve and other major central banks.
An index measuring the greenback against six peers fell 0.4 percent, trimming the steepest declines earlier in the session. The euro rose 0.7 percent to trade above parity with the US currency at $1.011. The pound also rose, adding 0.7 percent to $1,166.
The euro has fallen by more than a tenth this year, while the dollar is up nearly 13 percent – with the latter rising on aggressive interest rate increases and hawkish messages from the Federal Reserve about the future course of monetary policy.
The European Central Bank last Thursday raised borrowing costs by 0.75 percentage points to 0.75 percent, and signaled further increases to come — a sign of a more assertive approach to tackling inflation in the common currency area.
Jonathan Petersen, chief markets economist at Capital Economics, wrote that the catalyst for the dollar’s decline, which also fell on Friday, “appears to be the European Central Bank’s continued hawkishness and a rebound in risk appetite.”
Historically, the dollar has been viewed as a haven asset during times of economic stress. “We have a lot of traditional investors hiding in dollar assets; the stronger they get, the more they hide,” said Mark Tinker, chief investment officer at Tuscafund. “This means that there are a lot of people who are concerned about the dollar’s shift.”
Wall Street stocks advanced after the opening bell in New York on Monday, with the broad S&P 500 and the heavy Nasdaq Composite up 0.6 percent.
“You have a strong negative correlation between the dollar and the US stock market, with earnings for a lot of multinationals dropping when the dollar goes up,” said Bastian Drut, chief macro strategist at CPR Asset Management.
European shares also gained on Monday. The regional Stoxx 600 index rose 1.5 percent in afternoon trading, while the German DAX rose 2.1 percent, and the FTSE 100 in London rose 1.4 percent.
Investors will examine new US inflation data due on Tuesday for clues about the future path of higher interest rates in the world’s largest economy. Analysts polled by Reuters had expected the consumer price index for August to read 8.1 percent year on year, down from 8.5 percent in July.
A lower-than-expected CPI number – which in part helped lower gasoline prices in the US – could reduce estimates of the extent to which the Federal Reserve will raise interest rates, which in turn affects investor sentiment towards the US currency. By comparison, Europe is still in the grip of an energy crisis that has fueled inflationary pressures.
In the US “According to our expectations, inflation has peaked and . . . lower oil prices provide support for further declines in the future,” analysts at SEB wrote. They added that the pace of price growth could vary between the US and Europe this week, with UK CPI figures due as well.
Markets are pricing in the possibility of a rate hike of 0.75 percentage points at the Fed’s next monetary policy meeting in late September, which would mark the third consecutive increase of that size. The central bank’s current target range stands at 2.25 percent to 2.50 percent.
Federal Reserve Governor Christopher Waller on Friday Support for Another Big Surge On interest rates this month, he spoke on the last day that central bank officials could make public statements before the next policy meeting.
In the Asian stock markets, Japan’s Topix index rose 0.7 percent. Markets in Shanghai, Shenzhen, Hong Kong and South Korea are closed for the Mid-Autumn Festival holiday.
Additional reporting by Hudson Lockett in Hong Kong