Ben Bernanke, chairman of the US Federal Reserve, boosted the dollar on Monday with talk of the need for “vigilance” on inflation, seen as a sign the Fed is leaning towards at least one more interest rate increase at its next meeting.

The greenback bounced off a one-year low against the euro, brought on by Friday’s unexpectedly soft employment data which had lowered expectations for further tightening by the Fed, and rose against the yen.

Mr Bernanke’s remarks suggested that “a soft jobs report won’t be enough to sway the Fed from continued tightening”, said Marc Chandler of Brown Brothers Harriman.

Meanwhile, strong eurozone data last week fuelled expectations that the European Central Bank may even raise rates by 50 basis points on Thursday, although the vast majority of economists predict a quarter-point rise to 2.75 per cent.

Trading was quiet with holidays in a number of countries in Europe.

Growth in the US services sector slowed in May as prices paid by businesses rose sharply. The US Institute of Supply Management’s services index eased to 60.1 in May, in line with expectations and down from 63.0 in the previous month. But the prices-paid index spiked to 77.5 from 70.5, its highest since September when Hurricane Katrina drove up energy costs.

Late in the afternoon in New York, the dollar was holding its ground at $1.2917 against the single currency, having fallen to $1.2979 at one point. It rose 0.4 per cent ahead against the yen to Y112.14.

Sterling was the weakest of the leading currencies. The Bank of England is also due to announce its interest rate decision on Thursday. No change is expected, but the waning likelihood of an August increase was seen driving some profit-taking.

“The pound had risen quite strongly on interest rate expectations, stronger-than-expected economic data and a fairly hawkish set of minutes from the Bank of England,” Nick Parsons at Commerzbank said.

“But given the turmoil in equity markets, it is difficult to imagine that in the next 60 days the Bank of England will move to raising interest rates.”

Short sterling futures have fallen 15 basis points since May 12, suggesting the odds of a rate rise in August was now about 50:50.

Sterling fell 0.4 per cent against the dollar to $1.8782 and dropped 0.5 per cent versus the euro to £0.6895. The euro climbed 0.4 per cent against the yen to Y144.69.

The Turkish lira fell as low as TL1.607 against the dollar after data late on Friday showed inflation in Turkey for May registered its biggest monthly rise for 19 months.

The central bank is thought to now have little choice but to raise rates by 50 basis points. It brought forward its June 20 monetary policy meeting to this Wednesday. Any increase would be the bank’s first in four years.

The last rate cut, in April, took benchmark borrowing rates to 13.25 per cent and the lending rate to 16.25 per cent. The lira recovered to sit 0.4 per cent higher at TL1.5760 against the dollar. It hit an all-time low of TL2.0785 against the euro, before recovering to TL2.0410.

The Czech koruna fell 0.6 per cent to Kc28.343 after the country’s general election ended in stalemate. The right-wing opposition was asked to form a government but without a majority and any administration is likely to be weak.

Asian currencies earlier benefited from the dollar’s doldrums, with the South Korean won adding 0.5 per cent to Won942.9. The renminbi also had its biggest one-day rise since revaluation last July, up 0.2 per cent to Rmb8.0077. The currency is allowed to trade by up to 0.3 per cent each day either side of the so-called fixing rate against the dollar.

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