Dollar trims gains as markets weigh impact of OPEC+ cuts

[April 03, 2023]  By Samuel Indyk

LONDON (Reuters) - The dollar trimmed its initial gains against major pairs in the course of Monday as investors focus on diverging central bank policy, with the impact of oil production cuts complicating the inflation outlook.

An announcement on Sunday of output target cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, caused oil prices to jump by around 8% in early trade in Asia on Monday. Brent crude was last trading at $84 per barrel, up $4.10 or 5.1%. [O/R]

OPEC+ had been expected at a meeting on Sunday to stick to cuts of 2 million barrels per day (bpd) already in place until the end of 2023, but instead announced further output cuts of around 1.16 million bpd.

"A higher oil price will put pressure on global inflation and if we assume the banking turmoil continues to reside then the markets will increasingly focus on the inflation outlook," said Mohamad Al-Saraf, Associate, FX and Rates Strategy at Danske Bank.

The dollar, which had jumped on the surprise cut to output, slowly reversed course through the European morning to trade lower as attention turned back to central bank policy.

Data released on Friday showed an acceleration in core price growth in the euro area, which analysts said should strengthen the case for more rate hikes from the European Central Bank, while a measure of core inflation in the U.S. came in a shade lower than expected at 4.6%.

"Interest rate differentials are the main driver for euro-dollar," said Niels Christensen, chief analyst at Nordea.

"It was a surprise to see the euro lower this morning because data released last week should be supportive of more rate hikes from the ECB," Christensen added.

Traders are pricing in around 60 basis points of further tightening from the ECB by the end of the year. In contrast, markets price in around 15 basis points of tightening from the Fed, with 40 basis points of rate cuts by December.

Woman holds U.S. dollar banknotes in front of Euro banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

The euro was last up 0.2% to $1.0865, after touching a one-week low of $1.0788 earlier in the session.

The dollar index, which measures the currency against a basket of six currencies including the euro, was down 0.4% at 102.49.

Focus this week will be on U.S. activity data and Friday's jobs report, although many markets will be closed for the Easter holiday.

"If we get firm data from the U.S., the markets may have to revise its rate hike expectations and the dollar may get some support," Nordea's Christensen added.

The dollar rose 0.3% to 133.23 Japanese yen, after earlier hitting its highest level since March 17.

Sterling was at $1.2357, up 0.2% on the day, while the dollar rose 0.1% against the Swiss franc.

Oil-sensitive currencies, such as Norway's krone and the Canadian dollar were beneficiaries of the rising oil prices.

The risk-sensitive Australian dollar was last up 0.6% to $0.6724 ahead of a policy meeting at the Reserve Bank of Australia on Tuesday, with markets placing around an 85% chance the central bank will stand pat on interest rates after 10 interest rate hikes.

In cryptocurrencies, bitcoin was up 0.6% at $28,340. Ethereum rose 0.5% to $1,805.

(Reporting by Samuel Indyk in London and Ankur Banerjee in Singapore; Editing by Christian Schmollinger, Susan Fenton and Toby Chopra)

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