Dollar skids as bets rise on US rate hike pause

London

THE dollar weakened on Monday on growing bets that the US central bank will halt its multi-year rate hike cycle, with the euro and Norwegian kroner leading gains among its rivals.

Even after last week's strong US jobs data for December, market watchers believe the world's biggest economy is losing momentum.

Comments by US Federal Reserve chair Jerome Powell have added to market expectations that the central bank may adopt a more cautious outlook.

"The dollar is suffering from falling rate hike expectations and it should remain weak in the coming days," said Manuel Oliveri, a currency strategist at Credit Agricole.

Against a basket of its rivals, the greenback fell a quarter of a per cent to 95.95, nearing a 21/2 month low of 95.68 hit last week.

On Friday, Mr Powell told the American Economic Association that the Fed is not on a preset path of interest rate hikes and that it will be sensitive to the downside risks that markets are pricing in.

Money markets have priced out a US rate hike this year and are even pricing in a small probability of a rate cut in 2020.

The Fed raised rates four times in 2018.

Waning expectations of a rate hike boosted the euro with the single currency rising by more than a third of a per cent at US$1.1437. The Norwegian kroner meanwhile strengthened by more than half a per cent to 8.58 kroner per dollar.

The dollar outperformed other currencies in 2018 due to the Fed being the only major central bank to hike rates. If it stays on hold in 2019, other currencies such as the euro might benefit.

Derivative markets in the euro such as risk reversals - a gauge of calls to puts - have steadily climbed to their highest levels in more than six months as investors bet on more upside for the single currency.

News at the weekend of Chinese policy stimulus helped lift sentiment and boost commodity-focused currencies such as the Australian dollar.

After a slew of weaker-than-expected manufacturing data, the Chinese authorities on Friday cut reserve requirements for all banks by 100 basis points.

That will free up US$116 billion for new lending as China tries to reduce the risk of a pronounced fall in the pace of economic growth.

The Aussie gained 0.28 per cent to US$0.7123.

The dollar advanced 0.2 per cent versus the offshore yuan to 6.8483.

Financial markets are also optimistic about a meeting of US officials and their counterparts in Beijing this week, the first face-to-face talks since US President Donald Trump and Chinese President Xi Jinping agreed on Dec 1, 2018 to a 90-day truce in their trade war. REUTERS