Dollar licks wounds as Chinese data looms

By Tom Westbrook

SYDNEY (Reuters) – A battered dollar took a breather on Monday after suffering its worst weekly decline of the year, as traders awaited economic data and policy decisions before selling it further.

Chinese growth data and lending rate metrics are due later in the session, ahead of US retail sales and UK inflation later in the week and a series of central bank meetings next week.

The euro, which jumped 2.4% last week to a 16-month high, held just below that high at $1.1228. The yen, also up 2.4% last week, held at 138.69 to the dollar.

The dollar’s slide began with the buying of yen, as investors unwound yen-funded positions in emerging markets, but extended sharply after weaker-than-expected US inflation data supported bets that US interest rates would soon peak.

Hikes are expected from the Federal Reserve and European Central Bank next week, but beyond that, market prices imply the Fed will likely halt, ahead of next year’s cuts, while in Europe, another rise is likely.

“The foreign exchange market is leading a possible normalization of Fed policy in 2024,” said Chris Weston, head of research at brokerage Pepperstone in Melbourne.

“The question then becomes whether the dollar selloff has gone too far and whether we risk a mean reversion at the start of the week.”

The U.S. dollar index fell 2.2% last week, its biggest one-week drop since November, and was flat at 99.956 at the start of Monday’s Asian session.

The Australian dollar fell back from last week’s high of $0.6895 to trade at $0.6830 on Monday and similarly at $0.6364 the New Zealand dollar was below the five-month high of 0, $6412 from Friday.

The Antipodes could face pressure if Chinese data disappoints. Elsewhere, dollar moves have been so large that a short-term pause may be in order.

Strong yen gains have slowed as traders wonder if the ultra-dovish Bank of Japan is really likely to make changes at its policy meeting next week, given that rhetoric suggests they are in no rush .

The Swedish and Norwegian kroner gained more than 5% against the dollar last week. At $1.3089, the pound was just below last week’s 15-month high.

“The dollar could stay down as the market repositions itself for a less hawkish Fed,” said Jane Foley, head of FX strategy at Rabobank.

“That said, the outlook for the final months of the year is less clear,” she said.

“By then, other major central banks, including the ECB, will likely have reached their highest policy rates … so interest rate momentum could shift back in favor of the dollar.”

(Reporting by Tom Westbrook. Editing by Sam Holmes.)

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