Dollar edges down, ether’s 2-month high fuels crypto rally

The dollar struggled for direction on Tuesday as investors maintained their expectations for the timing of Federal Reserve monetary easing this year. Meanwhile, Ether was poised for its largest two-day gain in nearly two years, and Bitcoin neared a record high amid speculation about U.S. spot exchange-traded funds that would track the world’s second-largest cryptocurrency. The euro rose 0.12% to $1.0869.

Investors are anticipating Thursday’s data from the European Central Bank (ECB) negotiated wage tracker and the euro zone Purchasing Managers’ Index (PMI), which could offer further insights into the euro area’s monetary policy cycle. In contrast, the U.S. economic data calendar is sparse this week, so investor focus is shifting to numerous Federal Reserve speakers. Several officials on Monday emphasized the need for continued policy caution, even after last week’s data showed a slowdown in consumer price pressures in April.

Money markets are currently pricing in 42 basis points (bps) of Fed rate cuts in 2024, suggesting one 25 bps reduction and a 68% chance of a second cut by December, down from fully pricing in two cuts before recent hawkish comments from Fed officials. They are also betting on 63 bps of ECB rate cuts in 2024, down from around 73 bps in mid-May. Analysts noted that Atlanta Fed President Raphael Bostic’s comments, which indicated the Fed’s benchmark rate might remain higher than in the past decade, were supportive of the dollar.

“We expect the dollar to weaken after the first rate cut (by the Fed), which markets now price in September, but we also see the risk of a delay in monetary easing with the Fed making the first move in December,” said Athanasios Vamvakidis, global head of forex strategy at BofA. Against a basket of currencies, the dollar dropped 0.08% to 104.52.

George Saravelos, global head of forex research at Deutsche Bank, argued that there is a risk of greater divergence favoring the Fed, combined with the dollar’s status as a high-yielding currency, which supports its strength. The upcoming Personal Consumption Expenditures (PCE) price index report, the Fed’s preferred gauge of inflation, due on May 31, will be closely watched.

In the cryptocurrency market, Ether jumped 6.2% to $3,715.60 after reaching $3,730.70, its highest level since March 16. It surged nearly 14% in the previous session, marking its largest daily percentage gain since November 2022. Bitcoin surpassed the $70,000 level and was last trading 2% higher at $71,128, approaching its all-time high of $73,803.25 reached in March. Tony Sycamore, a market analyst at IG, noted that the rise in cryptocurrencies was partly driven by last week’s U.S. inflation data, which boosted risk sentiment and brought rate cuts back into consideration.

Against the yen, the dollar dropped 0.06% to 156.20, close to its lowest in over 30 years at around 160. Fears of intervention from Japanese authorities deterred traders from pushing the yen to new lows, though the significant interest rate differentials between the U.S. and Japan continued to make the yen an attractive funding currency. “Forex interventions can buy some time and temporarily avoid an excessive depreciation of the yen, but if the Fed starts cutting later than the markets currently expect, it can become challenging for Japanese authorities to keep the yen below certain levels,” Vamvakidis from BofA argued.

The Canadian dollar remained flat at $1.3627 ahead of inflation data later in the session. “We have called for a Bank of Canada (BoC) rate cut in June for the past couple of months, and are expecting that to make the loonie increasingly less attractive compared to other commodity currencies,” said Francesco Pesole, a strategist at ING. According to a Reuters poll, the BoC is expected to cut interest rates three times ahead of the Fed’s first move.

The New Zealand dollar fell 0.03% to $0.6103 ahead of the Reserve Bank of New Zealand policy meeting, which is expected to maintain its key interest rate at 5.50% on Wednesday.


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