The US dollar was lower on Monday but stayed near the 2½-month high it reached on Friday when it rallied on improved risk sentiment. The combination of China’s rate cut, the prospect of further monetary easing by the European Central Bank and positive earnings results by US tech companies gave a boost to global equity markets. European and US share indices closed higher on Friday and Chinese indices were also in positive territory on Monday, though below their peaks from earlier in Asian session.
Last week, the People’s Bank of China cut interest rates for a fifth time this year by 0.25% as the authorities struggle to revive a slowing economy. Attention will now focus on the Chinese government’s new five-year plan, which will be unveiled this week and is expected to include economic reforms and increased spending on infrastructure projects. Authorities could also announce a new growth target range after saying on Friday that the 7% growth target was not set in stone.
With further monetary easing on the horizon from the ECB, PBOC and potentially from the Bank of Japan, the monetary divergence with the US is set to widen as the Fed contemplates tightening monetary policy. Wednesday’s upcoming FOMC meeting could provide some guidance as to how soon the Fed is likely to start raising interest rates.
In the meantime, the dollar took a breather from its recent gains and was back below the 121 handle against the Japanese yen on Monday. The greenback dropped to 120.96 yen in late Asian trading, having started the session at 121.50 yen. The euro attempted to claw back its heavy losses from last week and rose to 1.1034 dollars, having opened the session just below 1.10 dollars. Against the pound, the euro managed to climb just above 0.7200 pounds. Cable was also higher as it rose to 1.5330 in late Asian session.
Crude oil prices remained subdued but were steady on Monday. WTI oil futures rose 0.1% to $44.67. This helped the aussie recover to 0.7258 from Friday’ low of 0.72060 against the greenback.
Looking ahead to the rest of the day, the German IFO business survey will be closely watched in European trading and new home sales will be the main data coming out of the US. But markets are likely to be cautious ahead of Wednesdays’ FOMC meeting, to be followed by Thursday’s RBNZ and Friday’s Bank of Japan meetings.