U.S. Dollar Index Tumbles as Euro Rebounds Amid Talk of ECB Policy Shift

The U.S. Dollar finished lower against a basket of currencies on Monday, mostly in response to a weaker Euro, which makes up a large percentage of the index.

June U.S. Dollar Index futures settled at 89.332, down 0.465 or -0.52%.

The dollar opened the session stronger as investors speculated whether the Federal Reserve would signal more aggressive rate hikes this year at Wednesday’s meeting. Traders said the Fed could become more aggressive in response to a tightening labor market.

The Federal Open Market Committee, the central bank’s policy-setting group, is widely expected to raise its benchmark interest rate 25-basis points from 1.50 percent to 1.75 percent.

EUR/USD

The Euro reversed earlier losses on Monday after a Reuters report that European Central Bank officials were shifting their debate from bond purchases to the expected path of interest rates, reviving bets that the ECB may raise rates sooner than previously thought.

The EUR/USD settled at 1.2334, up 0.0048 or +0.39%.

Five sources with direct knowledge of the discussion told Reuters, the debate among policymakers is increasingly about the steepness of the rate path, as some want future expectations contained given the slow rebound in inflation.

GBP/USD

The British Pound hit its highest level against the Euro in more than five weeks and against the dollar in more than a month, as Britain and the European Union appeared to reach a broad agreement on a post-Brexit transition period and the Irish border.

The GBP/USD settled at 1.4023, up 0.0082 or +0.59%.

The news could further strengthen the Sterling over the near-term because it has raised optimism about a smoother departure for Britain from the trading bloc.

USD/JPY

The Dollar/Yen finished higher on Monday after posting a volatile two-sided trade. The inside move on the daily chart suggests investors indecision and impending volatility. The wicked price action was fueled by the carry trade in reaction to a steep decline in U.S. equity indexes and a subsequent impressive rebound rally into the close.

The USD/JPY closed the session at 106.086, up 0.134 or +0.13%.

An expected Fed rate hike on Wednesday and uncertainty over the number of rate hikes the rest of the year, helped support the Dollar/Yen. However, gains were limited by the political scandal in Japan which may mean the end of Abenomics and the cheaper Yen.

AUD/USD

The Australian Dollar posted a small gain against the U.S. Dollar as investors positioned themselves ahead of Tuesday’s Reserve Bank of Australia Monetary Policy Meeting Minutes and Wednesday’s U.S. Federal Reserve interest rate decision and economic projections.

The AUD/USD settled at .7717, up 0.0007 or +0.09%.

NZD/USD

The New Zealand Dollar closed higher on Monday after reversing earlier losses. The rebound in the currency was helped by strong buying following a test of key technical retracement level on the daily chart.

The NZD/USD finished the session at .7243, up 0.0032 or +0.44%.

Also giving the Kiwi a boost was position-squaring ahead of this week’s Reserve Bank of New Zealand’s interest rate decision and monetary policy statement. Traders widely expect the central bank to leave its benchmark interest rate unchanged while stating that it has no intention to raise rates over the near-term due to weak inflation.