Dollar heads for monthly loss with Fed seen pausing rate hikes

Investing.com - The U.S. dollar edged higher in early European trade Monday, but is on course for a monthly loss as traders weigh up the possibility of an end to the Federal Reserve’s tightening cycle, while the Japanese yen weakened in the wake of the Bank of Japan’s monetary policy shift.

At 03:10 ET (07:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 101.570.

Dollar heads for another monthly loss

The dollar has started the new week on a positive note but is still on course to register a monthly decline of roughly 1%, its second straight losing month.

The U.S. Federal Reserve hiked interest rates last week, but expectations are growing that this could be the last increase of the central bank’s aggressive year-long tightening cycle.

Chair Jerome Powell pointed to the importance of upcoming data, with two CPI prints, two jobs reports, and the Employment Cost Index due before the September meeting.

The second-quarter ECI figure came in at 1.0% on Friday – a drop from 1.2% in the first quarter and a peak of 1.4% in the first quarter of 2022. This suggests the inflationary pressure from rising wages is lessening, adding to the reasons for Fed policymakers to stand still in September.

Yen weakens after BOJ shift

USD/JPY rose 0.5% to 141.88, with the yen extending Friday’s losses after a volatile session after the Bank of Japan widened its yield curve control policy, allowing the 10-year yield to move 0.5% around the 0% target.

The yen has weakened, after initial gains, as traders decided that this move could result in the BoJ maintaining its ultra-low rates for longer, especially after the central bank earlier Monday reportedly bought about $2 billion worth of bonds in an unscheduled operation.

Yuan slips after weak manufacturing PMI

USD/CNY climbed 0.5% to 7.1482 after data showed that the country’s manufacturing sector shrank for a fourth straight month in July, indicating that the world’s second-largest economy was still struggling with a post-COVID recovery.

This weakness is expected to prompt Beijing to announce further stimulus measures to boost the flagging economy.

China's State Council on Monday announced plans to restore and expand consumption in the automobile, real estate, and services sector, but traders are looking for specifics.

Euro edges lower ahead of key data

EUR/USD edged lower to 1.1014, ahead of the release of key eurozone inflation and growth data after European Central Bank President Christine Lagarde hinted at a pause in its tightening cycle as soon as September.

German retail sales fell 0.8% on the month in June, an annual drop of 1.6%, pointing at continued weakness in the most important economy in the eurozone.

Elsewhere, GBP/USD rose 0.1% to 1.2860, ahead of the Bank of England's policy meeting later this week, where expectations are for a quarter-point rate hike.

AUD/USD rose 0.6% to 0.6690, while NZD/USD rose 0.5% to 0.6193.