The US dollar saw a significant rise during early European trade on Monday as oil prices surged, raising concerns about inflation. This increase in inflation could lead to the US Federal Reserve lifting interest rates at its next meeting. 

At 03:00 ET (07:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% higher at 102.560, after earlier breaking past 103 for the first time in a week.

In March, the Dollar Index had dropped by 1.8% due to concerns that the turmoil in the banking sector would affect economic activity, leading the Fed to pause its monetary tightening cycle earlier than expected. 

The release of data on Friday showed that consumer spending in the US had only moderately increased in February, with signs of inflation cooling, thereby providing some credibility to this view. 

However, the OPEC+ decision on Sunday to cut production by over one million barrels per day has resulted in soaring oil prices, changing the narrative.

According to Hidehiro Joke, a strategist at Mizuho Securities, “since inflation is likely to remain the biggest driver of the Fed’s monetary policy, the market will be less likely to assume an early shift to lower rates or a faster pace of rate cuts.” 

As a result, the EUR/USD traded 0.2% lower at 1.0812, after touching a one-week low of 1.0788 as the dollar surged, while the GBP/USD fell 0.2% to 1.2306.

Later in the session, economic data for manufacturing PMI numbers for both the Eurozone and the UK were expected to be released, indicating that this crucial sector remained in contraction in March. 

Meanwhile, the USD/JPY rose 0.6% to 133.62 after Japan’s manufacturing PMI increased to 49.2 in March from February’s 47.7, marking the slowest contraction since November 2022. 

However, the rise in US bond yields following the OPEC+ decision weighed on the yen, with the two-year US Treasury yield up 4.8 basis points at 4.110%.

Furthermore, the USD/CNY rose 0.3% to 6.8884 after the release of data showing that growth in China’s manufacturing sector had slowed in March, with the Caixin PMI coming in at 50, retreating from an eight-month high of 51.6 hits in February. 

This aligns with last week’s government data, which indicated that growth in China’s manufacturing sector had slowed down after an initial post-COVID bounce.


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