By Jaspreet Kalra
MUMBAI (Reuters) – The dollar slipped on Monday at the start of a week of central bank policy decisions, including from the U.S. Federal Reserve, while the euro eased slightly after Fitch downgraded France’s credit rating late last week.
Sterling rose 0.5% to $1.3619, its strongest since early July, while the dollar was down 0.2% against the Japanese yen at 147.38 yen.
The euro nudged up against the dollar, but slipped about 0.1% each against sterling and the yen. The common currency was also down about 0.3% each against the Norwegian and Swedish crowns.
Fitch Ratings downgraded France’s sovereign credit score after hours on Friday, citing the government’s rising debt burden. The move strips the euro zone’s second-largest economy of its AA- status.
The downgrade was largely priced in by the markets in advance, as reflected in the muted reaction seen in the euro to the announcement, said Nick Rees, head of macro research at Monex Europe.
Analysts have pointed out that while fiscal worries in France could limit the euro’s gains in the near term, they are unlikely to spur a meaningful decline in the currency.
Data shows that speculative net long positions on the euro against the U.S. dollar continue to hold strong, ticking up to $18.4 billion as of the week ended September 8, near a two-year peak.
The euro’s resilience is underpinned by expectations of Federal Reserve policy easing alongside diminishing prospects for further European Central Bank rate cuts.
“The widening policy divergence opening up between the ECB and Fed heading into year-end will help to lift EUR/USD towards the 1.2000-level although the pair is currently struggling to break out of the recent trading range between 1.1500 and 1.1800,” analysts at MUFG said in a note.
Investors are closely monitoring this week’s key rate decisions in the U.S., Japan, United Kingdom, Canada and Norway, with the Federal Reserve’s decision on Wednesday taking centre stage.
Money markets are fully pricing in a 25 basis-point Fed rate cut, with a 5% chance of an outsized 50 bp reduction.
Just as important will be Fed members’ “dot plot” projections for rates, and guidance from Fed Chair Jerome Powell for gauging the extent and pace of further easing.
“We expect the statement to acknowledge the softening in the labour market, but do not expect a change to the policy guidance or a nod to an October cut,” analysts at Goldman Sachs said in a note.
Both the Bank of England and Bank of Japan are expected to keep policy rates unchanged this week. Analysts are focusing on the BoE’s plans to slow its reduction of government bond holdings and the BOJ’s commentary to gauge the likelihood of a rate hike over the remainder of the year.
Among other currencies, the dollar was weaker against the Swiss franc, as well as the Norwegian and Swedish crowns.
The onshore yuan meanwhile got a slight lift from a weaker greenback despite Monday’s grim economic data, which showed China’s factory output and retail sales in August logged their weakest growth since last year.
Also on investors’ radars were talks between U.S. and Chinese officials, who concluded a first day of talks in Madrid on Sunday on their strained trade ties and a looming divestiture deadline for Chinese short-video app TikTok.
(Reporting by Jaspreet Kalra and Rae Wee; Editing by Sonali Paul, Jacqueline Wong and Jan Harvey)
