The Dollar rose against the Euro on Monday, boosted by year-end transactions as well as speculation that US inflation may cause the Federal Reserve to be less aggressive in cutting interest rates next year.
But tight credit conditions and fear of slower US growth weakened the Dollar elsewhere, with the Yen and Swiss franc rising as investors unwound carry trades that involve borrowing these currencies to fund purchases of higher-yielding assets.
US equities also fell as investors worried that rising inflation and signs of weak holiday retail sales would further darken the economic outlook for the world's largest economy. Analysts said the market mood remains mildly favorable for the Dollar heading into year-end, partly on the view that rising US inflation may keep the Fed from cutting benchmark short-term rates at its next policy meeting on Jan. 30.
Yesterday, EurUsd traded unchanged at 1.4412, after earlier dipping to a 1-1/2-month low of 1.4331. UsdJpy was also unchanged to 113.25 after touching 112.83 low. UsdChf hit 1.1515 low before ending unchanged at 1.1552. EurJpy fell 0.51% to 162.67 while GbpJpy fell 0.21% to 228.12. GbpUsd gained 0.24% to 2.0210.
The Fed is still expected to lower rates in 2008 to shield the economy from a slumping housing market, but analysts think price pressures could force officials to adopt a slower pace of monetary easing. This would not significantly erode the Dollar's yield advantage, since global growth worries are likely to prompt other major Central Banks to cut rates or hold them steady. Interest rate futures are reflecting about a 90% implied chance of a 25bp interest rate cut in January, down from around 100% last week. Earlier on Monday, they fell to around 70%.
Yesterday, an unexpected surge to $114 billion in U.S. long-term capital inflows in October, well above September's $15.4 billion inflow, lent some Dollar support, though analysts were skeptical about the data's relevance.