LONDON—The euro dipped on Monday after a surge last week that followed a hawkish shift by the European Central Bank, as traders turned to the dollar betting the jump in U.S. jobs created in January could lead to faster Federal Reserve rate hikes.
The European common currency dropped 0.2 percent to as low as $1.1415, having hit its highest since mid-January on Friday.
Those gains had been driven by a hawkish turn from the ECB, which led markets to bring forward the likely timing of eurozone rate rises and sent bond yields sharply higher.
“President [Christine] Lagarde’s clear signal that the door has opened for rate hikes later this year is a real game changer for the foreign exchange market,” said MUFG analyst Lee Hardman.
“Over the past year the EUR has underperformed on the back of expectations that the ECB will maintain loose policy while the BoE and Fed tightens,” Hardman said, predicting that market participants would now pare back short euro funding positions.
ECB policymaker Martins Kazaks, in an interview with Reuters, pushed back against market expectations for a rate hike as soon as July. He said the ECB could end its stimulus program earlier than planned but it was unlikely to raise its main interest rate in July.
Not everyone is convinced by the market’s reading of the ECB’s hawkish tilt.
“We don’t believe the ECB is bracing for a sudden acceleration of tightening. We still see the Fed as being on track to move well ahead of the ECB, providing support for the dollar,” said Mark Haefele, Chief Investment Officer at UBS Global Wealth Management.
He said he expected the euro to fall to $1.10 by year-end and the dollar gaining versus the Swiss franc to finish the year at 0.98 francs per dollar, from 0.92 currently.
The dollar found some support on Monday, helped by U.S. Treasury yields that rose after far better-than-expected jobs data on Friday.
Markets have now priced in a one-in-three chance the Fed might hike by a full 50 basis points in March, and a reasonable chance rates will reach 1.5 percent by year end.
These expectations could be bolstered by the U.S. consumer price index due Thursday.
The dollar index climbed 0.1 percent to 95.483, off the 95.136 touched last week before the labor market numbers.
U.S. two-year yields held firm after briefly touching a new a two-year high of 1.33 percent.
The U.S. currency dropped 0.2 percent to 114.94 Japanese yen. Sterling slipped 0.1 percent to $1.3511 but both currencies remained in the middle of their recent ranges.
Markets will be watching scheduled speeches by policymakers at the Fed and the UK, European, Australian, and Canadian central banks this week, to see whether they drop any further hints on rate policy.
Bitcoin rose 0.7 percent to $42,715 after jumping 11 percent late on Friday.
