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Aggressive rate hike bets have boosted the dollar with an index
rising to a near two-decade high of 105.79 earlier this month.
But with some high-frequency data indicators showing economic
momentum starting to cool and a broader drop in commodity
prices, investors are becoming cautious.
"The dollar index is trading towards the lower end of its recent
trading range suggesting some vulnerability to further
weakness," said Shaun Osborne, an analyst at Scotiabank, said.
"We feel the broader dollar rally will struggle to extend
significantly but losses are liable to remain limited unless or
until a more significant bearish catalyst emerges."
Against its rivals, the dollar edged 0.2% lower to 103.86.
Earlier this month, it hit 105.79, its highest since late 2002.
While slowing growth concerns have weighed on sentiment, lower
inflation expectations, chiefly through falling commodity prices
have also eased the pressure for higher rates.
For example, copper is on track for its largest monthly decline
since the pandemic-fuelled selloff in March 2020. Oil prices are
set to see a monthly decline for the first time this year.
Falling commodity prices have weighed on expectations of where
U.S. interest rates will peak next year. Higher terminal pricing
of benchmark interest rates has been a key support for the
dollar but that source of strength has faded in recent days.
Futures pricing shows traders now anticipating the U.S. Federal
Reserve's benchmark funds rate stabilising around 3.5% from
March next year, a pullback from pricing in rates zooming to
around 4% in 2023.
"Broadly speaking, markets have priced a lower and earlier
terminal rate from the Fed as a result, which is shaving some of
the dollar's appeal from a yield differential basis," said Simon
Harvey, head of FX analysis at Monex Europe.
The euro led gainers versus the dollar as the European Central
Bank's annual forum in Sintra got underway with ECB President
Christine Lagarde and Federal Reserve Chair Jerome Powell both
attending the meeting. Markets will watch for any signs of
future policy moves.
The euro is up 0.2% at $1.0580.
Commodity currencies came under pressure on Monday as data
showed profits at China's industrial firms shrank again, albeit
at a slower pace, in May after a sharp fall in April.
Elsewhere, Russia's rouble weakened in the interbank market as
Russia headed for its first sovereign default since the
Bolshevik revolution a century ago.
Cryptocurrencies solidified gains, with the world's biggest
cryptocurrency Bitcoin up 1.4%, trading at $21,170.88 after
falling as low as $17,588.88 earlier this month.
(Reporting by Saikat Chatterjee; Editing by Muralikumar
Anantharaman and Jane Merriman)
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