Dollar surges; Fed plans reassessed after surprise OPEC+ cut

By Peter Nurse

Investing.com - The U.S. dollar rose strongly in early European trade Monday as surging oil prices raised inflation concerns, which could prompt the U.S. Federal Reserve to lift interest rates at its next meeting.

At 03:00 ET (07:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% higher at 102.560, after earlier breaking past 103 for the first time in a week.

The index had dropped 1.8% in March, pressured by concerns that turmoil in the banking sector would hit economic activity, prompting the Fed to pause its monetary tightening cycle earlier than previously expected.

This view was given a degree of credence after data on Friday showed U.S. consumer spending rose only moderately in February after surging the prior month, with inflation showing some signs of cooling.

However, the surprise decision of the Organization of Petroleum Exporting Countries and allies, known as OPEC+, on Sunday to cut production once more by just over 1 million barrels per day has sent oil prices soaring, changing the narrative.

“Since inflation is likely to remain the biggest driver of the Fed’s monetary policy, the market will be less likely to assume an early shift to lower rates or a faster pace of rate cuts,” said Hidehiro Joke, a strategist at Mizuho Securities.

EUR/USD traded 0.2% lower at 1.0812, after earlier touching a one-week low of 1.0788 as the dollar surged, while GBP/USD fell 0.2% to 1.2306.

Economic data due for release later in the session include manufacturing PMI numbers for both the Eurozone and the U.K. These are expected to show that this important sector remained in contraction in March. 

USD/JPY rose 0.6% to 133.62 after Japan’s manufacturing PMI rose to 49.2 in March from February's 47.7, marking the slowest contraction since November 2022.

However, the yen was weighed by the rise in U.S. bond yields in the wake of the OPEC+ decision, with the two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, up 4.8 basis points at 4.110%. 

USD/CNY rose 0.3% to 6.8884 after data showed growth in China’s manufacturing sector slowed in March, with the Caixin PMI coming in at 50, retreating from an eight-month high of 51.6 hit in February. 

This tallies with last week’s government data that showed that growth in China’s manufacturing sector was slowing after an initial post-COVID bounce.