LONDON NEW YORK The dollar dropped on Monday after the announcement of unexpected oil output cuts from OPEC, as investors focused on a divergent central bank policy with the Federal Reserve viewed as nearing the end of its rate-hike cycle.
The global inflation outlook has been complicated by the impact of oil production cuts.
Oil prices in early trade in Asia increased by around 8 per cent after an announcement by the Organization of the Petroleum Exporting Countries OPEC and its allies on Sunday. The price of crude was $84.48 per barrel, up 5.8 per cent.
The dollar went up after the announcement.
The OPEC had been expected to stick to cuts of two million barrels per day bpd, already in place until the end of 2023, but instead announced further output cuts of around 1.16 million barrels per day.
Karl Schamotta, chief market strategist at Corpay in Toronto, said that the knee-jerk reaction is fading as markets pivot back to the deeper disinflational fundamentals that are likely to drive the monetary policy outlook.
Central banks are thought to stay focused on growth, employment and core inflation measures, which reflect energy prices at a long lag, so market-implied odds on rate cuts are reverting to pre-production cut levels. He said that rate differentials are inversely turning back against the dollar.
On Monday, federal funds futures were priced in a 65 per cent chance of another 25 basis-point bp U.S. rate hike in May and a pause in June. The futures traders have also factored in rate cuts by December.
The 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 the core inflation in the U.S. was a bit lower than expected, at 4.6 per cent.
According to Niels Christensen, chief analyst at Nordea, said interest rate differentials are the main driver of the euro-dollar.
Around 60 basis points of further tightening from the ECB are expected to be achieved by the end of the year, according to traders.
The euro was up 0.2 per cent at $1.0866 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 0.5 per cent at 102.94.
Many markets will be closed for the Easter holiday due to the U.S. activity data and Friday's jobs report.
If we get firm data from the U.S., the markets may have to revise rate hike expectations and the dollar may get some support, according to Christensen, Nordea's Christensen.
The dollar rose 0.2 per cent to 132.99 yen against the Japanese currency after hitting its highest level since mid-March.
The pound was at $1.2379, a gain of 0.4 per cent, while the dollar was slightly lower against the Swiss franc at 0.914 francs.
Oil sensitive currencies, such as Norway's krone and the Canadian dollar, were beneficiaries of rising oil prices.
The risk-sensitive Australian dollar was up 1.2 per cent at US $0.6763 at the Reserve Bank of Australia on Tuesday, with markets placing an 85 per cent chance that the central bank will stand pat on interest rates after 10 hikes.