SINGAPORE- The dollar started the week on a steady footing as investors took stock of US economic data ahead of the Federal Reserve policy meeting this week, while escalating geopolitical tensions in the Middle East kept a lid on risk sentiment.
The dollar index which measures the US currency against six rivals, was little changed at 103.50 on Monday and remained close to the six-week high of 103.82 it touched last week. The index is set for a 2 percent gain in January as traders temper expectations of early and deep US interest rate cuts.
The Fed in December surprised markets by taking a dovish tilt and projecting 75 basis points of rate cuts in 2024, resulting in traders pricing in aggressive easing, with a cut expected as early as March.
But since then, strong economic data and pushback from central bankers have prompted traders to adjust expectations. Markets are currently pricing in a 48 percent chance of a rate cut in March, the CME FedWatch tool showed, compared with an 86 percent chance at the end of December.
“The markets recognize that tightening cycle is over. However, they swung hard, pricing in aggressive easing by most of the G10 central banks,” said Marc Chandler, chief market strategist, at Bannockburn Forex.
The coming weeks will likely continue the correction of the trends that began last month, Chandler said.
Data on Friday showed US prices rose moderately in December, keeping the annual increase in inflation below 3 percent for a third straight month and reinforcing expectations that rate cuts are likely to come this year.
Investor attention this week will squarely be on the Federal Reserve’s two-day policy meeting which starts on Tuesday, with the central bank widely expected to stand pat on rates, leaving the spotlight all on Fed Chair Jerome Powell and his comments.