The Dollar fell on Monday for the first time in three sessions as oil prices hit a record high, sparking debate about the strength of the US economy. The US services sector grew in April for the first time in four months, according to a report on Monday. But that news was overshadowed by a Federal Reserve survey showing the banking sector remained in the grips of a credit crunch.
After trimming interest rates to 2% last week, the Federal Reserve hinted it may move to the sidelines and pause its aggressive seven-month easing campaign that has reduced the Dollar's appeal to global investors. But while data shows the US economy continued to eke out modest growth in the first three months of 2008, investors remain wary with oil at a fresh record high above $120 a barrel and more corporate fallout expected from the credit crunch.
Yesterday trading volumes were lighter than usual with London and Tokyo closed for public holidays. EurUsd rose 0.44% to 1.5505 despite weaker than expected investors sentiment index in May. Investors are far more concerned with the expected trajectory of European Central Bank interest rate policy. With food and energy costs on the rise, ECB President Jean-Claude Trichet warned again on Monday of significant inflation risks, suggesting benchmark rates would likely stay fixed at 4% when the central bank meets on Thursday.
Consumer prices in the euro-zone rose by 3.3% in the last 12 months, below the prior month's reading but still well above the ECB's target of about 2%. The Fed next meets on June 24-25 and federal funds futures contracts were on Monday pricing in just a 12% chance of another 25bp rate cut to 1.75%.