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Dollar Rises, Euro Declines Following Cautious ECB Stance

The Dollar strengthens against the Euro as the European Central Bank adopts a cautious approach to rate hikes, impacting currency movements and monetary policy dynamics.

Dollars and Euros

The Dollar experienced gains against the Euro after the European Central Bank (ECB) slowed its pace of rate hikes, just a day after the Federal Reserve increased rates by 25 basis points. It hinted at a potential pause for future increases. The ECB's 25-basis-point increase was the smallest since it started raising them last summer, but the bank also indicated that additional tightening is necessary to control inflation.

ECB's Dovish Tone and Economic Effects

Sebastian Vismara, a global macroeconomist and strategist at BNY Mellon Investment Management, commented that the ECB was relatively dovish, with a more cautious tone and increased focus on past effects of tightening and the forceful transmission to the Euro area economy. The Fed, on Wednesday, removed language from its policy statement that suggested further rate increases would be needed.

Dollar Index Update and Currency Movements

The Dollar index was up 0.30% at 101.52, holding just above a one-year low of 100.78 on April 14 and down from a 20-year high of 114.78 on September 28. The Euro fell 0.52% to $1.1004 after reaching a 13-month high of $1.1096 last week. The Dollar also declined 0.33% to 134.18 Japanese yen.

Monetary Policy Dynamics and Rate Cuts

Investors have recently favored the single currency against the greenback, anticipating the Dollar's interest rate advantage over the single currency to continue to decrease. However, analysts believe much of that expected movement may already be priced in, with the next focus likely being when the U.S. central bank will start cutting rates.

Market Expectations for Fed Rate Cuts

Money markets are currently pricing in a 15% chance that the Fed will begin cutting rates in June and expect approximately 80 basis points of rate cuts by the end of the year. Shaun Osborne, chief FX strategist at Scotiabank in Toronto, noted that the monetary policy dynamics are more or less fully priced regarding the tightening cycle. The focus will shift to when the Fed starts to ease and how that relates to what other central banks are doing.

Banking Sector Turmoil and Greenback Boost

Fears of banking sector turmoil, intensified by the news that PacWest Bancorp is exploring strategic options, support the argument that the Fed will soon begin easing monetary conditions. The Los Angeles-based lender mentioned that several potential partners and investors had approached it. The greenback also gained on Thursday after data revealed that U.S. Unit labor costs surged at a 6.3% rate in the first quarter, following a 3.3% increase in the fourth quarter.

U.S. Economic Focus and Jobs Report

This week's primary U.S. economic focus will be Friday's jobs report for April, which is projected to show that employers added 180,000 jobs during the month while average earnings are anticipated to have increased at an annual rate of 4.2%. Sterling dipped 0.06% to $1.2561 after hitting $1.2593 earlier on Thursday, the highest since June 2022.

Greenback Performance Against Other Currencies

The greenback was last down 0.17% against the Norwegian crown at 10.73 after Norway's central bank raised interest rates by 25 basis points, as expected.