The Dollar Seesaws Ahead of a Busy Week for Central Banks

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The U.S. dollar seesawed heavily on Monday, distancing itself from an eight-month trough as central banks worldwide prepare for a busy week of meetings.

The U.S. dollar index, which measures the greenback against a basket of currencies, rose 0.03% to 101.92 on Monday, recovering from the eight-month low of 101.50 it hit last week. A dovish repricing of U.S. Federal Reserve rate hike expectations limited the greenback’s gains.

A currency strategist at National Australia Bank (NAB), Rodrigo Catril, said, “We will range trade a little bit as the market tries to assess how the central banks behave… I think, for all three, it’s going to be more about what they say than what they do.”

However, the greenback’s gains were limited by a dovish repricing of US Federal Reserve rate hike expectations due to market uncertainty in light of upcoming policy meetings from the Fed, European Central Bank (ECB) and Bank of England (BoE).

Meanwhile, the sterling was up 0.04% at $1.2405, while the euro rose 0.06% to $1.0874 in light of this development. However, the overall movement remained subdued ahead of these highly anticipated central bank decisions later this week.

The US Federal Reserve is widely expected to deliver a 25 basis point rate hike this week – a downshift from the 50bp and 75bp increases seen last year. Market watchers anticipate that the Bank of England and the European Central Bank will raise rates by 50bp each.

The dollar has seen an overall weakening trend since May 2020 due to these concerns about inflation and doubts about whether the Fed’s policies are sufficient to keep pace. Despite this downward pressure on its value, some analysts suggest it could benefit from a sense of stability if all three central banks move forward with rate hikes this week.

Although investors expect higher rates, any surprises from these central bank decisions could create significant volatility for currency markets and stocks alike.

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