Fed fund futures now show investors believe the most likely outcome for the Fed’s February meeting is for a 25-basis-point increase. Image Credit: Reuters

New York: The US dollar on Monday fell to its weakest level in seven months against the euro as traders bet recent economic data would prompt the Federal Reserve to slow the pace of rate hikes, while risky currencies benefited from China reopening borders.

The euro was up 0.95 per cent at $1.0745 at 10:30am EST (7.30pm UAE time), its highest versus the greenback since June 9, adding to Friday’s 1.17 per cent increase.

Sterling rose 0.72 per cent to $1.218 against the dollar, building on Friday’s 1.5 per cent rally, while the Swiss Franc surged 1.1 per cent to $0.9174, its strongest since early March.

The moves continued the trend lower for the dollar, which in the final three months of 2022 posted its biggest quarterly loss in 12 years. That was driven mainly by investors’ belief that the Fed will not raise rates beyond 5 per cent, from its current range of 4.25-4.50 per cent, as inflation and growth cool.

“The Fed will be taking last week’s data as broadly positive, an affirmation that its rate hikes are starting to have their intended effect - even if the labour market remains robust,” said Richard Flax, chief investment officer at Moneyfarm.

Two separate reports on Friday painted a picture of an economy that is growing and adding jobs, but where overall activity is tilting into recession territory, prompting traders to sell the dollar against a range of currencies.

Friday’s monthly employment report showed a bigger-than-expected increase in the number of workers and a slowing in wage growth - welcome news for the US central bank.

A report from the Institute for Supply Management showed activity in the service sector contracted for the first time in two-and-a-half-years in December.

The dollar index was at a seven-month low, last down 0.2 per cent at 103.54. The index, which measures the greenback against six major currencies, tumbled 1.15 per cent on Friday as investors shifted into riskier assets.

Focus on inflation

But, with consumer inflation data due later this week, it is the outlook for price pressures that is still front and centre for investors.

“The expectation with this week’s Consumer Price Index is for further easing of inflation pressures,” said Greg McBride, chief financial analyst at Bankrate. “Anything less than broad-based improvement will rattle investors’ nerves and keep the Fed active.” The Fed raised interest rates by 50 basis points last month after delivering four consecutive 75-basis-point hikes last year, but said it was likely to keep interest rates higher for longer to tame inflation.

Fed fund futures now show investors believe the most likely outcome for the Fed’s February meeting is for a 25-basis-point increase.

Elsewhere, China continued to dismantle much of its strict zero-COVID rules around movement as it reopened its borders.

Optimism about a swift economic recovery sent China’s offshore yuan to five-month highs against the dollar on Monday.

The Australian dollar rose by 1.05 per cent to $0.69475, hitting its highest against the US currency since August 30, while the kiwi was last up 0.7 per cent at $0.6394.