The dollar, which had suffered its worst weekly decline of the year on Friday, took a breather on Monday as traders waited for economic data and political decisions before further selling it.
Later in the session will be the release of Chinese growth data, as well as the setting of loan rates. This is followed by the U.S. Retail Sales and British Inflation later in this week. Next week there will also be a number of central bank meetings.
The euro, which rose 2.4% to a 16 month high last week, held at $1.1228, just below this peak. The yen also rose 2.4% in the last week and held steady at 138.69 to $1.
Dollar's decline began with yen purchases, as investors unwinded yen-funded emerging market positions. But it accelerated after U.S. inflation numbers were softer than expected, which supported bets that U.S. rates would soon peak.
Federal Reserve and European Central Bank are both expected to raise rates next week. However, market pricing suggests that the Fed is likely to stop before cutting next year. In Europe, another rate hike may be on the horizon.
Chris Weston of Pepperstone, Melbourne's head of research, said that the FX market was anticipating a possible normalization of Fed policies in 2024.
The question is then whether the dollar's sell-off went too far, and if we are in danger of a mean reversion this week.
The U.S. Dollar Index dropped 2.2% in one week last week, the sharpest drop since November. It was stable at 99.956 during early Asia on Monday.
The Australian dollar, which peaked at $0.6895 last week, is now trading at $0.6830. Similarly, the New Zealand Dollar was at $0.6364 below its five-month high of $0.6412 on Friday.
If Chinese data are disappointing, the Antipodeans may be under pressure. The dollar has moved so much elsewhere that a temporary breather is in order.
The sharp gains in the yen are slowing down as traders assess whether the ultra-dovish Bank of Japan will really make any changes at its next policy meeting, given that their rhetoric suggests they're not in a hurry.
Last week, the Swedish and Norwegian drowns saw gains of over 5% against the dollar. Sterling was just $1.3089 below the 15-month high reached last week.
Jane Foley, head of FX Strategy at Rabobank, said that the dollar could remain in the rear as the market positions itself for a Fed less hawkish.
She said that the outlook for the last few months of this year was less certain.
The dollar's interest rate dynamics could swing back to its favor if other central banks, including the ECB, reach their policy peak rates by then.