After European Central Bank President Christine Lagarde would not rule out a 50 basis point interest rate hike at the bank’s July meeting, the dollar continued to decline in European morning trade.
By 3:30 AM ET (07:30 GMT), the euro had risen 0.3% to $1.0724, its highest level in in a month. The dollar index, in which the EUR/USD exchange rate has the most weighting, fell 0.2% to 101.86.
The greenback has lost momentum in recent days as the ECB has signaled more explicitly that it will raise interest rates for the first time in a decade at its July meeting, closing the policy gap with the Federal Reserve.
Monday, Lagarde released a blog post on the ECB’s website in which she predicted that the ECB would exit negative interest rate territory by the end of the third quarter. Despite the fact that this showed a turn toward tightening, the euro dropped later in the day on concerns that the timing was set to rule out a 50 basis point boost in July, which more hawkish ECB policymakers feel is necessary.
Lagarde fought back against such claims during an interview with Bloomberg on the margins of the World Economic Forum in Davos, stating that nothing was off the table but that the ECB’s steps should be gradual.
The current deposit rate of the European Central Bank (ECB) is -0.5%, while its refinancing rate is 0%. In the current climate of high excess liquidity, the deposit rate effectively determines the minimum level of market interest rates.
Lagarde spoke immediately prior to the release of the initial preliminary purchasing managers index for May by S&P Global. Both the manufacturing and services PMIs for France came in slightly below estimates, but remained firmly within the expansionary zone. Unexpectedly, Germany’s manufacturing PMI posted its first improvement in three months.
After a reevaluation of China’s fiscal stimulus statement on Monday, the market sentiment has returned to a risk-averse stance. While markets liked the concept of tax rebates worth over $20 billion for corporations, the whole amount was disappointing to many and offered no clear escape route from the growth trap Beijing’s “Zero Covid” goal had created.
The offshore yuan decreased by 0.4% to 6.6857 following a significant increase in response to Monday’s news.
Aside from the United States, the Turkish lira depreciated against the dollar for the first time this year due to persistent inflation fears. As a significant net importer of energy, the nation is especially vulnerable to the increase in oil and gas prices this year. In contrast, the carefully regulated Russian ruble continued to strengthen against the dollar, reaching another four-year high of 56.91.