Euro At One-week High, Helped By Rowback In Fed Rate Hike Bets

The euro firmed to a one-week high on Monday, benefiting from the dollar's retreat after several Federal Reserve officials signaled they did not favour stepping up the rate hiking pace.

The comments made late last week knocked the dollar off two-decade highs and encouraged traders to add to risk, boosting global stocks and non-dollar currencies, especially the euro.

The greenback's index, measuring its rate against six global currencies, is now 1.8% off last week's 20-year peaks and by 0800 GMT, stood 0.35% lower at 107.48. The euro, the main component in that index, firmed 0.5% at $1.0149, having plunged below parity last week for the first time since 2002.

"With equity markets still in positive territory, risk appetite is back so the comments from Fed governor (Christopher) Waller, ramming back on the 100 bps rise, have had the desired impact," said Derek Halpenny, head of research at MUFG.

Waller and St Louis Fed governor James Bullard said they favoured a 75-basis-point interest rate increase at their July 26-27 meeting, rather than the 100 bps move some had pencilled in following an above-forecast inflation reading.

After the comments, futures tied to the short-term federal funds policy rate firmly favour a 75 bps hike.

Speculators remain bearish on most non-dollar currencies, however, with weekly U.S. CFTC data showing aggregate dollar long positions at a seven-week highs. They added to euro and yen short positions by $1 billion and $470 million respectively, the data showed.

Graphic: euro positions and vol,

Meanwhile, other central banks are upping the rate-hiking pace, with Canada delivering a 100 bps increase last week and New Zealand's three-decade high inflation print on Monday fuelling speculation of a 75 bps move, rather than the 50 bps earlier priced.

That lifted the kiwi dollar to a 10-day high against the greenback of $0.62, up 0.4%.

The Australian dollar also touched a one-week high.

"A more synchronised policy dynamic globally will help curtail dollar strength," Halpenny said, though he does not expect a greenback turnaround until the end of the third quarter.

The commodity-reliant Kiwi and Aussie dollars are getting some support from hopes of policy easing in China, where authorities flagged support for the property sector and banks.

China's central bank may deliver long-awaited policy easing on Wednesday, some reckon.

"The silver lining is that China does not currently face imminent or heightened inflationary pressures, which allows the policy makers to stick to its easing bias to support the recovery," said Peiqian Liu, China economist at NatWest Markets.

The offshore-traded yuan firmed 0.4% at 6.74 per dollar.

EURO: GAS AND RATE HIKES

It's shaping up to be a momentous week for the euro, with the European Central Bank expected to raise interest rates by 25 bps on Thursday for the first time in over a decade.

On the same day, Russia is meant to resume gas supply via the Nord Stream pipeline after a 10-day maintenance shutdown [MKTS/GLOB]. Failure to do so will spook markets, already fearing economic recession in the bloc.

Halpenny remains bearish on the euro, highlighting "a whole list of risks" for the single currency.

"With Nord Stream and the political situation in Italy, there is no compelling fundamental reason for a turnaround in euro/dollar," Halpenny said, contrasting the expected 25 bps ECB move with the 75 bps expected from the Fed.

In Italy, investors are watching to see the fate of Prime Minister Mario Draghi who will address parliament this week after his resignation was rejected by the country's president.