The dollar fell versus the euro on Monday, snapping a three-session winning streak, as record euro-zone inflation (HICP final in May came out 0.6% M/M and 3.7% Y/Y versus the previous month 0.3% and 3.3% respectively) cemented expectations of a European Central Bank interest rate hike next month and as oil prices spiked to record highs.
The euro rose to a session high of 1.5519, pushing further away from Friday's one-month low at 1.5303 versus greenback, up 0.6 percent on the day. Euro-zone inflation rose to a record high of 3.7 percent year-on-year in May, prompting hawkish comments from ECB Governing Council member Nout Wellink, who said stabilizing inflation in the medium-term was a priority.
At the same time, U.S. economic data showed the New York Fed's Empire State general business conditions index fell to minus 8.68 from minus 3.23 in May, worse than market expectations for a reading of minus 3.00. U.S. crude oil futures soared close to $140 per barrel.
The euro climbed to a session high of 167.69 (highest level since October) and 1.6190 versus Japanese yen and Swiss franc respectively. While an ECB interest rate increase appears certain, analysts doubt the Fed will follow Chairman Ben Bernanke's tough inflation talk with action because U.S. economic growth remains sluggish.
U.S. interest rate futures continued to lean toward a Fed rate hike as early as August.
The dollar gave up early gains versus the yen that had propelled it to a four-month high at 108.59 yen. The U.S. Dollar Index traded on ICE futures decreased for the first time in three days, falling 0.7 percent to 73.61. It touched 74.314 on June 13, the highest since Feb. 28. Euro-led rally also helped cable and the pair rose to a session high of 1.9688, while the dollar fell 0.7 percent versus its Canadian counterpart to 1.0197.
Tuesday is seem to be a volatile trading day as economic data release includes Japan’s Tertiary industry index (Apr) and year-on-year Machine tools order (May), Swissland’s industrial production for Q1, U.K.’s CPI and RPI data (May), EU’s trade balance (Jun), Germany Zew survey(Jun), following by U.S.’s May data on building permits, housing starts, PPI, current account (Q1) at 12:30GMT, and capacity utilisation and industrial production at 13:30GMT.