Dollar mixed against peers before Fed; pound returns some gains

The dollar was mixed ahead of a week stacked with central bank decisions, while sterling returned some of its post-budget progress.

The Dollar Index faded to 98.96 points on Monday, from 99.03 at the same time on Friday.

Analysts at ING commented: "The DXY dollar index is ending the year around 9% lower, with the entirety of those losses coming in the first half. In retrospect, that dollar sell-off seems largely a function of the buyside adjusting their USD hedging ratios from levels that were too low. Importantly, there was no fire sale of US assets.

"There is also the small matter of a change at the top of the Federal Reserve. Kevin Hassett looks the odds-on favourite to replace Jerome Powell as Fed Chair. Whether he will be as dovish as feared remains to be seen, but we think there will be increased focus on USD real interest rates. A Hassett-run Fed may well run real rates lower than now and that would be a clear negative for the dollar."

Against the dollar, the euro advanced to USD1.1655 on Monday afternoon UK time, from USD1.1645 on Friday.

ING analysts continued: "Our call remains that EUR/USD heads to 1.22 by end-2026 as lower US rates, lower energy prices and, crucially, the arrival of German fiscal stimulus supports higher valuation levels for the euro. In Europe, that will be played out in a higher EUR/GBP and perhaps even a higher EUR/CHF, too."

Versus the euro, sterling faded to EUR1.1429 from EUR1.1452. Against the dollar, the pound declined to USD1.3326 from USD1.3340.

On the eve of the UK government budget, sterling bought USD1.3144 and EUR1.1377. The Bank of England announces a rate decision next week Thursday.

Ebury analyst Enrique Diaz-Alvarez commented: "With the UK economy showing signs of slowing, the jobs market remaining fragile and inflation finally dropping from its highs, we think that another cut is almost a certainty next week. But, the key will be the voting split among the committee and bank’s communications on future easing. The combination of relatively high rates, modest economic growth and a dovish Federal Reserve should keep the wind at the back of the pound in the coming months."

This week, there is a rate call from Reserve Bank of Australia on Tuesday, the Bank of Canada and US Federal Reserve on Wednesday and the Swiss National Bank on Thursday.

The dollar rose to CHF0.8054 on Monday from CHF0.8036 Friday. Against the Canadian dollar, the buck fell to CAD1.3803 from CAD1.3937. Versus its Australian counterpart, the greenback slipped ever-so-slightly to AUD1.5051 from AUD1.5053.

Bannockburn analyst Marc Chandler commented: "The key event next week is the Federal Reserve meeting. There are three other G10 central banks that meet, but the others, the Reserve Bank Australia, the Swiss National Bank, and the Bank of Canada will stand pat. There is little doubt in the market's mind that the Federal Reserve will cut rates in the week ahead. In anticipation of the Fed's cuts in September and October, the dollar was sold, but it rallied after the cuts were delivered."