Euro to the fore as hawkish hike looms

SINGAPORE  – The dollar was on the back foot and the euro climbed on Tuesday, as regional bank jitters had traders expecting U.S. interest rate cuts before long, while in Europe a 50 basis point hike remains a live option at next week’s central bank meeting.

The euro rose above $1.10 overnight and was still going at $1.1062 early in the Asia session. Trade was thinned by holidays in Australia and New Zealand and ahead of central bank meetings in Japan on Friday and the U.S. and Europe next week.

European Central Bank (ECB) board member Isabel Schnabel told Politico that a 50-bp rate hike was not off the table and would depend on data – notably inflation figures due two days before May’s meeting.

ECB likely to stick to big rate hike despite banking turmoil, source says

French ECB policymaker Francois Villeroy de Galhau seemed to have a different view, calling for further hikes to be limited in number and size in an interview with Le Figaro, but markets have focused on the fact that still more hikes are expected.

Futures pricing implies about a 2/3 chance of a 25 bp ECB hike and a 1/3 change of a larger 50 bp rise.

“It’s not fully priced in yet, so if the ECB does go 50 then it will be euro supportive, I think that’s what’s being reflected in the market,” Bank of Singapore currency strategist Moh Siong Sim said.

The euro has also hit an eight-year high at 148.47 yen as the Bank of Japan’s new governor, Kazuo Ueda, has been signaling he is not in a hurry to shift policy. This week’s BOJ meeting, which concludes on Friday, is his first in charge.

According to Electronic Broking Services data stretching back to the early 2000s, the yen is also at its lowest on the Swiss franc in two decades at 151.33 per franc.

The yen has been steady on the dollar and last traded at 134.28 per greenback.

News overnight of plunging deposits at First Republic Bank in the U.S. served as a reminder that stability risks have not entirely died down and prompted traders to renew expectations that the Fed shifts quickly from hiking to cutting.

First Republic Bank deposits tumble more than $100B as it explores options

Fed funds futures imply about an 88-percent chance of a hike next week, followed by some 50 bps of cuts by year end.

The U.S. dollar index dropped 0.4 88 percent overnight and hit a ten-day low of 101.19 in early Asia trade.

The Australian dollar was steady at $0.6699 as traders waited on Aussie CPI data due on Wednesday.

The New Zealand dollar, which has been under pressure since surprisingly soft inflation figures last week, bounced a bit overnight and held at $0.6176 on Tuesday, just above its 200-day moving average.

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