Dollar drops as Fed rate cut bets rise

Bets for Fed cuts this year, beginning as early as March, have risen after data on Friday showed U.S. producer prices unexpectedly dropped in December, sending Treasury yields down in response

The dollar ebbed on Monday as investors revived their bets of early rate cuts by the Federal Reserve, while the yuan dropped to a one-month low after China's central bank surprised markets by keeping its medium-term policy rate steady.

The People's Bank of China (PBOC) left interest rates unchanged when rolling over maturing medium-term policy loans, defying market expectations for a reduction to shore up China's bumpy post-pandemic economic recovery.

That sent the onshore yuan slipping to a one-month low of 7.1813 per dollar, while its offshore counterpart dropped as much as 7.1906 per dollar, staying near Friday's one-month low.

China's fourth-quarter GDP, December industrial production, retail sales and unemployment rate are among the key economic indicators out on Wednesday, which are likely to provide further clarity on the outlook for the world's second-biggest economy.

In the wider market, traders also have their eye on a reading on UK inflation due later in the week, as the market focus remains on how soon major central banks globally could begin cutting rates this year.

Sterling dipped 0.1% to $1.2730, though it stayed near a two-week high touched last week.

The euro stayed near the $1.10 mark and was up 0.13% at $1.0964. The dollar index slipped 0.1% to 102.30, having drifted largely sideways the past couple of sessions.

Bets for Fed cuts this year, beginning as early as March, have risen after data on Friday showed U.S. producer prices unexpectedly dropped in December, sending Treasury yields down in response.

We move past the U.S. CPI and PPI releases and the market has become even more convinced that the Fed's easing cycle starts in March, with a 25 basis point cut priced for every meeting from this starting point, said Chris Weston, head of research at Pepperstone.

Market pricing now points to a 78% probability that the Fed will begin easing rates in March, as compared to a 68% probability a week ago, as per the CME FedWatch tool.

In Asia, the yen stayed under pressure at 145.15 per dollar on expectations that the BoJ is likely to keep its ultra-loose policy settings unchanged at its upcoming policy meeting next week.

The Australian dollar, often used as a liquid proxy for the yuan, inched up 0.13% to $0.6695. The New Zealand dollar slid 0.11% to $0.6234.

I expect (Wednesday's) data dump to show weak momentum in the Chinese economy, said Carol Kong, a currency strategist at Commonwealth Bank of Australia.