The US dollar remained stable at the opening on Monday as investors focused on inflation data from the US, Europe, and Japan to guide global interest rate outlooks.
In recent months, forex trading has been dominated by the pursuit of "carry trades," which penalize low-yield currencies and support the dollar. Meanwhile, mixed US data has undermined policymakers' confidence in the interest rate outlook.
Several major currency pairs remained in narrow ranges. The euro rose 0.9% against the dollar last week and currently stands at $1.0846, which is the midpoint of its range over the past year.
Trading volume was reduced on Monday due to holidays in the UK and the US.
Wednesday's German inflation data and Friday's eurozone data will be closely watched to confirm traders' expectations of a rate cut in Europe next week.
The British pound tested its high for the year at $1.2735. Both the Australian dollar and the New Zealand dollar retreated from their recent highs, standing at $0.6637 and $0.6122 respectively, as market expectations for US rate cuts diminished.
The core personal consumption expenditure price index (the Federal Reserve's preferred inflation measure), set to be released on Friday, is expected to remain stable month-on-month.
The dollar fell after data showed a slowdown in April consumer price increases, confirming a trend that could further weaken the dollar. However, overall inflation and inflation indicators remain above the Federal Reserve's 2% target.
"Achieving the 2% inflation target now seems more distant than it did at the end of last year, requiring multiple weaker inflation readings to restore confidence," analysts at Natixis said.
Continued Carry Trades
Despite ongoing uncertainty around interest rates, investors have been chasing yields and selling low-yield currencies like the yen, renminbi, and Swiss franc while buying euros and dollars.
The Swiss franc has been falling this year, hitting its lowest point since April 2023 at 0.9928 francs per euro last week. The Chinese renminbi closed last week at below 7.24 per dollar, the lowest level since early May.
Due to interventions by Japanese authorities in late April and early May, the yen may see its first monthly gain this year, but it has been falling back since then.
On Monday, the yen was stable at 156.87 against the dollar but gained little support from rising Japanese government bond yields. For example, the 10-year bond yield is still nearly 350 basis points lower than that of the US.
Friday's Tokyo Consumer Price Index (CPI), a reliable guide to national trends, will be closely watched. Additionally, Friday's data from the Ministry of Finance will reveal the scale of Japan's interventions.
Another factor to watch in this week's currency trading is the US move to shorten stock market settlement times from two days to one. Traders expect this may drive trading into Asia's early morning hours.
"Asian investors will only have a few hours to aggregate funding needs, process forex instructions related to trading, and manage execution," said Lloyd Rees, Head of Global Custody Services for APAC and the Middle East at BNY Mellon (NYSE: BK).
In the cryptocurrency market, Ether posted its largest weekly gain in nearly three years after some US exchange-traded fund (ETF) applications were approved.
Further approval is still required for the launch, but last week, the second-largest cryptocurrency by market value increased 25% against the dollar. On Monday, it gained an additional 5% during Asian trading to $3938.
"A month ago, many believed the likelihood of an Ethereum ETF was low or distant," said Justin D'Anethan, Head of Partnerships at digital asset market maker Keyrock.
