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Weak Dollar as Fed Nears End of Hiking Cycle

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The U.S. dollar languished near two-month lows in early European trade Monday as weak economic data support the idea that the U.S. Federal Reserve may be near the end of its rate-hiking cycle.

At 02:55 ET (06:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, edged just higher at 101.295, just above a fresh two-month low of 101.140 hit earlier in the session.

The dollar started last month on a firm footing on expectations sticky inflation would prompt the Federal Reserve to take interest rates higher than previously thought.

However, the failure of two regional U.S. banks in March tempered those expectations, and soft economic data has added to the growing belief that the U.S. central bank may soon stop increasing interest rates, a move which is dollar bearish.

U.S. job openings dropped to their lowest level in nearly two years in February, data showed Tuesday, and this followed on from Monday’s Institute of Supply Management’s manufacturing purchasing managers index falling to a 21-month low in February.

Federal Reserve Bank of Cleveland President Loretta Mester indicated on Tuesday that the central bank likely has more rate rises ahead of it, seeing the fed funds rate moving above 5%.

However, with the Fed raising rates by a quarter percentage point, to between 4.75% and 5%, in March, this could mean only one more hike of 25 basis points before pausing.

The European Central Bank, on the other hand, potentially could hike by 50 basis points in early May, with Governing Council member Robert Holzmann stating earlier this week that such a move is “still on the cards”.

This “serves as a reminder that the ECB lags the Fed in its tightening cycle and that the ECB will be a lot slower to ease policy,” said analysts at ING, in a note.

EUR/USD traded 0.1% lower at 1.0948, just below the two-month peak it hit on Tuesday, helped by German industrial orders soaring 4.8% in February driven by strong growth in the vehicle construction sector.

“Overall we suspect that the market will be reluctant to chase EUR/USD above 1.10 yet given concerns about the regional US banking system. But a higher EUR/USD certainly looks the direction of travel for the rest of the year,” ING added.

GBP/USD fell 0.1% to 1.2487, slipping from Tuesday’s ten-month high, AUD/USD fell 0.4% to 0.6727, while USD/JPY fell 0.1% to 131.56 after data also showed that Japan’s service sector grew at a higher-than-expected pace in March, largely offsetting a decline in manufacturing activity.

NZD/USD rose 0.6% to 0.6348 after the Reserve Bank of New Zealand lifted its benchmark interest rate by a bigger-than-expected 50 basis points, and flagged more action against high inflation.

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