Euro holds near five-year low as potential Fed hike nears

[May 03, 2022]  By Joice Alves

LONDON (Reuters) - The euro held close to a five-year low against the U.S. dollar on Tuesday with the Federal Reserve expected to hike rates this week, while traders wait for European Central Bank President Christine Lagarde to give clues on her monetary policy plans.

The Fed has taken an increasingly aggressive approach to monetary policy as inflation rose at its fastest pace in 40 years, while the ECB has been more cautious.

The U.S. central bank is seen raising interest rates by 50 basis points and announce plans to reduce its $9 trillion balance sheet when it concludes its two-day meeting on Wednesday.

In the meantime, ECB Vice President Luis de Guindos said in an interview published over the weekend by the central bank that its Governing Council hadn't discussed "any predetermined path for rate rises". He added that much will depend on macroeconomic data in June.

"After the dovish comments from de Guindos over the weekend, we will monitor Lagarde's latest comments today," said Jeremy Stretch, head of G10 FX strategy at CIBC.

Lagarde is expected to speak later in the day.

Money markets are pricing 90 basis points in interest rate hikes by the end of the year, with a first hike expected in July. [IRPR]

Concerns about inflation, growth and energy insecurity as a result of sanctions imposed on Russia after its invasion of Ukraine have sent the euro 14% lower against the dollar in three months.

At 1100 GMT, the single currency was flat at $1.05040. It had dropped to $1.0470 on Thursday, its lowest since January 2017.

"The euro appears to have found some support just above the 1.05 area which is helped today by a slightly softer U.S. dollar," said Jane Foley, head of FX strategy, at Rabobank in London.

"The European Union’s energy security issues remain precarious suggesting that the euro is certainly not out of the woods yet," she added.

Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS/Jason Lee

Providing no support to the euro, data showed on Tuesday that euro zone unemployment continued to fall hitting a new record low.

Stretch said he did not expect the data to impact on the ECB's rate expectations or on the euro.

The dollar was also flat at 103.6 against a basket of currencies, after reaching 103.48 on Thursday, the highest since December 2002.

Though the chances are seen as low, some investors are watching for the possibility of a 75-basis-point rise from the Fed or a faster pace of balance sheet reduction than currently expected.

In past weeks, the U.S. dollar has also benefited from safe-haven flows as COVID-19 restrictions in China have triggered concerns about global growth.

The dollar reached 6.6880 against the Chinese yuan in offshore markets, its highest since November 2020.

The Japanese yen held just above 20-year lows against the dollar reached on Thursday, when the Bank of Japan strengthened its commitment to keep interest rates ultra-low by vowing to buy unlimited amounts of bonds daily to defend its yield target.

The Japanese currency was last at 130.10, after reaching 131.24 on Thursday, the weakest since April 2002.

(Reporting by Joice Alves; Editing by Bradley Perrett and Emelia Sithole-Matarise)

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