On Monday, the US dollar was struggling against its major peers, as softening expectations of inflation prompted investors to reassess the possibility of an aggressive hike in the interest rates. Fortunately, a broader decline was prevented due to the volatility in the markets.

Investors become cautious

The dollar index saw a boost thanks to the bets of aggressive interest rate hikes, which saw it rise to 105.79 earlier this month, a high of almost two decades. However, investors are now becoming cautious because there has been a fall in commodity prices and there are some high-frequency data indicators, which show that economic activity might finally be slowing down.

Market analysts said that the dollar index had reached the lower bound of its recent range, which shows that there could be further weakened. They said that a broad rally in the dollar would not be able to extend significantly. But, they also added that losses would also remain limited until a major bearish catalyst comes to light.

The dollar had declined by 0.2% against its rivals, which brought it to 103.86. It had hit a value of 105.79 earlier this month, which is the highest the currency has been since late 2002.

Interest rate uncertainty

While the sentiment is certainly down because of the concerns about cooling economic growth, the expectations of lower inflation have also eased the possibility of higher rates. These expectations have come down because commodity prices have declined in the past week.

Copper is on its way to recording the largest decline in prices in a month since the sell-off that occurred back in March 2020 because of the coronavirus pandemic. Likewise, oil prices are also on the course of recording their first monthly decline this year.

The fall in the price of commodities has weighed on the predictions of the peak of US interest rates in the coming year. The dollar has received a lot of support because of expectations of higher interest rates, but in recent days, the expectations have pulled back due to which the greenback is weakening.

Futures pricing’s impact

Futures pricing indicates that the US Federal Reserve’s benchmark interest rate will stabilize in March next year at around 3.5%. Previously, the same prediction had been around 4%. Analysts said that now markets believe the Fed will lower the speed of hiking, or will not be as aggressive as before.

The euro was leading gains against the dollar, as the annual forum of the European Central Bank (ECB) began in Sintra. Both the President of the ECB, Christine Lagarde, and the Chairman of the Federal Reserve, Jerome Powell will be attending the meeting. Markets are tracking the meeting for any signs of future policy hints.

The euro recorded an increase of 0.2% against the dollar to reach $1.0580. On Monday, commodity currencies were under a lot of pressure, as data showed a reduction in China’s industrial performance again in May, even though the pace had slowed down, as opposed to the pace in April.