LONDON (Reuters) – Buying from the start of European trade on Monday halted three days of losses for the dollar, the impact of higher U.S. market interest rates turning it positive on the day against both the euro <eur=>and a basket of currencies. (DXY)</eur=>
A wave of profit-taking on some of the greenback’s gains of the past fortnight has been encouraged since Thursday by signs the European Central Bank is beginning to think more about how to react to an improving euro zone economy.
Some ECB policymakers last week raised the possibility of increasing interest rates before it ends its emergency asset purchases although the discussion was isolated and did not enjoy any broad support, sources said on Friday.
Friday’s solid jobs number has still cemented the case for a rise in U.S. Federal Reserve rates this week that will long predate any European move and sees market rates far higher.
Belgian central banker Jan Smets also told the Wall Street Journal that the ECB had not taken a first step toward removing stimulus.
“There was also always the chance that once we got a good payrolls number on Friday, the market would take some money off the table and that duly occurred,” said Neil Mellor, a currency strategist with Bank of New York Mellon (NYSE:BK) in London.
“But the fundamentals are still behind the dollar. A lot is priced in but when you have a currency that is outstanding in terms of yield, the sell off was always going to limited.”
By 0840, the dollar had recovered around a third of a cent from lows hit in Asian time to stand flat on the day at $1.0680. The dollar index was marginally higher at 101.26.
Fed fund futures prices showed investors pricing in more than a 90 percent chance of an increase in U.S. overnight interest rates and the market’s attention is now firmly on the scale of tightening further out.
Money market pricing still stops short of three quarter-point rises this year. If the Fed can continue to move every three months, it will deliver four.
A Reuters poll of 23 primary dealers showed a dozen of them expected the Fed to raise rates to 1.00 to 1.25 percent by its June meeting, while 10 of them expected a rate increase by its September meeting.
“Everyone wants to see the economic projections of FOMC members, to gauge whether they will indeed stick to a path of raising interest rates in both June and September,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank in Tokyo.