Dollar Declines as Investors Analyze Economic Data for Fed Policy Insights

The dollar faced a decline against the euro and yen on Monday, with investors navigating through last week’s mixed U.S. economic data. Attention is now turning towards a crucial inflation reading, aiming to gather insights into when the Federal Reserve might initiate interest rate cuts.

Initially gaining momentum on Friday due to stronger-than-expected employment data, the dollar later retreated as investors delved into underlying factors indicating weaknesses in the job market. A subsequent report revealing a significant slowdown in the U.S. services sector further contributed to the dollar’s decline.

Helen Given, an FX trader at Monex USA, noted, “There are definitely cracks slowing down the pace of labor hiring in the U.S. and the labor market is definitely loosening.”

This week’s focal economic data is the consumer price inflation report for December, set to be released on Thursday. Projections anticipate a 0.2% increase in monthly headline inflation and a 3.2% rise on an annual basis.

A report from the New York Fed highlighted a decrease in U.S. consumers’ short-term inflation expectations to the lowest level in nearly three years in December. If inflation moves closer to the Fed’s 2% annual target, the likelihood of rate cuts in the upcoming months may increase.

Traders in Fed funds futures are currently pricing in rate cuts starting in March, though the probability has decreased from 89% to 64% in a week, according to CME Group’s FedWatch Tool.

Atlanta Fed President Raphael Bostic expressed a bias towards keeping monetary policy tight, given that inflation remains above the central bank’s target. The dollar index, which rose 1% last week, was down 0.17% at 102.24.

While the euro gained 0.12% to $1.0954, the greenback fell 0.37% against the Japanese yen, reaching 144.11. Analysts anticipate the Bank of Japan to be an outlier by lifting rates out of negative territory this year, though the recent earthquake may impact the timing of such a move.

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