Dollar hits 7-month low vs euro on expectations of slower Fed hikes

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By John McCrank and Amanda Cooper

NEW YORK (Reuters) -The U.S. dollar on Monday fell to its weakest level in seven months against the euro as traders bet recent economic data would prompt the Federal Reserve to slow the pace of rate hikes, while risky currencies benefited from China reopening borders.

The euro was up 0.95% at $1.0745 at 10:30 a.m. EST (1730 GMT), its highest versus the greenback since June 9, adding to Friday's 1.17% increase.

Sterling rose 0.72% to $1.218 against the dollar, building on Friday's 1.5% rally, while the Swiss Franc surged 1.1% to $0.9174, its strongest since early March.

The moves continued the trend lower for the dollar, which in the final three months of 2022 posted its biggest quarterly loss in 12 years. That was driven mainly by investors' belief that the Fed will not raise rates beyond 5%, from its current range of 4.25%-4.50%, as inflation and growth cool.

"The Fed will be taking last week's data as broadly positive – an affirmation that its rate hikes are starting to have their intended effect - even if the labor market remains robust," said Richard Flax, chief investment officer at Moneyfarm.

Two separate reports on Friday painted a picture of an economy that is growing and adding jobs, but where overall activity is tilting into recession territory, prompting traders to sell the dollar against a range of currencies.

Friday's monthly employment report showed a bigger-than-expected increase in the number of workers and a slowing in wage growth - welcome news for the U.S. central bank.

A report from the Institute for Supply Management showed activity in the service sector contracted for the first time in 2-1/2 years in December.

The dollar index was at a 7-month low, last down 0.2% at 103.54. The index, which measures the greenback against six major currencies, tumbled 1.15% on Friday as investors shifted into riskier assets.

FOCUS ON INFLATION

But, with consumer inflation data due later this week, it is the outlook for price pressures that is still front and centre for investors.

"The expectation with this week's Consumer Price Index is for further easing of inflation pressures," said Greg McBride, chief financial analyst at Bankrate. "Anything less than broad-based improvement will rattle investors' nerves and keep the Fed active."

The Fed raised interest rates by 50 basis points last month after delivering four consecutive 75-basis-point hikes last year, but said it was likely to keep interest rates higher for longer to tame inflation.

Fed fund futures now show investors believe the most likely outcome for the Fed's February meeting is for a 25-basis- point increase.

Elsewhere, China continued to dismantle much of its strict zero-COVID rules around movement as it reopened its borders.

Optimism about a swift economic recovery sent China's offshore yuan to five-month highs against the dollar on Monday.

The Australian dollar rose by 1.05% to $0.69475, hitting its highest against the U.S. currency since Aug. 30, while the kiwi was last up 0.7% at $0.6394.