Dollar firms as oil prices moderate, taking momentum from euro

2/2
© Reuters. FILE PHOTO: Currency signs of Japanese Yen, Euro and the U.S. dollar are seen on a board outside a currency exchange office at Narita International airport, near Tokyo, Japan, March 25, 2016. REUTERS/Yuya Shino
2/2

By David Henry and Stefano Rebaudo

NEW YORK/MILAN (Reuters) – The U.S. dollar lost value to the euro and other major currencies on Tuesday after oil prices fell on indications of COVID-crimped economic growth in China amid ongoing talks to halt the Russia-Ukraine conflict.

The dollar index against major currencies fell nearly 0.4% to 98.735 but was still up nearly 3% since Russia invaded Ukraine on Feb. 24.

The euro and British pound each gained about 0.5% on the greenback, which also lost 0.2% against the Japanese yen.

Brent crude futures dropped as much as 8% after concerns over supply were eased by ongoing Ukraine ceasefire talks and as rising COVID-19 cases in China suggested slower economic growth and less demand for oil.

The European economy and the single currency are especially sensitive to the war and to the price of oil.

“This (the drop in oil price) reflects the hope that the talks between the Russian and Ukrainian negotiators might lead to an imminent and peaceful solution after all,” Commerzbank (DE:CBKG) forex analysts said in a note to clients.

Earlier in the day, major currency pairs had been relatively steady as markets waited to hear on Wednesday the tone of U.S. Federal Reserve comments on interest rate policies in coming months.

Traders want to see if the Fed gives hints to how quickly it will raise rates again after putting through the quarter-point increase they expect to be announced on Wednesday.

“The path that the Fed lays out for the rest of the year is going to be more interesting than the actual rate hike itself,” said Minh Trang, senior FX trader at Silicon Valley Bank.

The dollar’s rise since May last year makes the tone of Fed comments on Wednesday more important.

Its recent gains have come on its safe haven status during the Ukraine war and on expectations that U.S. interest rates will rise faster than rates on other currencies. The Bank of Japan, for example, is not expected to raise interest rates when it meets on Friday.

“The dollar is at pretty high levels. We would need a hawkish surprise from the Fed to see a further rise, but I think the bar is quite high for that,” Matthew Ryan, senior market analyst at Ebury, said.

“It will be difficult for the dollar to stage any meaningful rally after the Fed policy meeting.”

On Tuesday the dollar’s slight fallback revealed a little bit of risk-on sentiment in the market, Trang said.