The euro and sterling rose against the dollar on Monday in a quiet trading session amidst a holiday in the United States, while global risk sentiment has improved.

With the United States’ markets closed for Independence Day, markets anticipated a modest trading day, with most currencies gaining momentum versus the US dollar, which had risen to a two-week high on Friday.

The euro climbed 0.3 percent to $1.0457, remaining just above the five-year low of $1.0349 set in May. Sterling gained 0.5 percent to $1.2155 after falling to a two-week low of $1.1976 on Friday.

“Quiet trading to start the week is seeing the U.S. dollar weaken against most major currencies as it unwinds Friday’s gains while ignoring a modest risk-off tone in markets,” said Shaun Osborne, chief FX strategist at Scotiabank.

Reports that the White House would announce a reduction in certain Chinese tariffs later this week in an effort to cool rising inflation helped restore some confidence in markets, “giving currencies an extra push against the U.S. dollar,” Osborne said.

After reaching two-year lows on Friday, the Australian and New Zealand dollars, as well as the Swedish crown, all gained on Monday.

However, with global recession worries, the euro stayed around a five-year low versus the safe-haven dollar.

The Ukraine crisis and its economic ramifications, particularly surging food and energy prices, have been a big drag on the euro, which has fallen 8% versus the dollar this year. The disparity in the European Central Bank’s and the Federal Reserve’s responses to rising inflation has also impacted on the euro.

Data released on Friday showed eurozone inflation surging to a new high, bolstering the case for the ECB to raise interest rates for the first time in a decade this month.

Jeremy Stretch, head of G10 FX strategy at CIBC, expects the euro to remain under pressure as the ECB raises rates by “a mere 25 basis point” on July 21.

“ECB action remains moderate when compared with a 75bps Fed hike,” he added. “Beyond ECB monetary policy discussion, the primary European Union risk variable relates to the energy sector.”

Even while markets have reduced their expectations for US rate hikes, safe-haven demand has kept the dollar strong. The market is putting in an 85 percent possibility of another 75 basis point boost this month, with rates at 3.25 percent to 3.5 percent by the end of the year – before cuts in 2023.

The US dollar index fell 0.15 percent to 104.9, not far from the two-decade high of 105.790 set last month.

Investors are looking forward to the release of minutes from last month’s Fed meeting on Wednesday and U.S. employment statistics on Friday.

The Reserve Bank of Australia will meet on Tuesday, and markets have priced in a 40 basis point (bp) increase in interest rates. If a raise of that magnitude or more is delivered, the Australian may not get much of a lift.

Source: Reuters

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