Dollar eases further, with eyes on interest rates

LOS ANGELES (MarketWatch) — The U.S. dollar maintained its slow ebb downward against major rivals, with attention fixed on interest-rate outlooks after a week of range-bound trading for foreign exchange majors.

In early Monday currency action in East Asia, the ICE dollar index DXY +0.42%  traded at 79.291, down from 79.344 late Friday in North America.

The dollar index’s decline extended a trend from the previous week, with the greenback losing ground Friday as bond yields moved away from favoring the U.S. See report on Friday’s currency trade.

Currency analysts debated where U.S. rates were headed longer-term, with DailyFX currency analyst David Song saying monetary officials in Washington would look toward tighter policy as early as this year.

“As [Federal Reserve] officials take note of sticky prices paired with the more robust recovery, it looks as though the central bank will conclude its easing cycle this year, and the shift in the policy outlook casts a bullish forecast for the [dollar] as interest rate expectations start to pick up,“ Song said.

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But analysts at Capital Economics said they believe the Fed will stick to its current guidance of no increase to the benchmark federal funds target rate until 2014, meaning that “a substantial rise in the 10-year Treasury yield would also seem unlikely before 2013 is out.”

Among other major currencies, the euro and Japanese yen added to their gains against the dollar from late last week.

The euro EURUSD -0.46%  firmed slightly to $1.3268, up from $1.3265 late Friday, while the dollar slipped marginally against the yen USDJPY +0.34%   to ¥82.34 from Friday’s ¥82.46.

The British pound GBPUSD -0.34% , however, moved fractionally lower to $1.5867, down from $1.5874.

For the week ahead, RBC Capital Markets senior currency strategist Stewart Hall said Italy’s upcoming bond auction may offer a catalyst for the global forex markets.

“Thursday may prove to be a bit of a hump, with Italy papering the primary market with €7.5 billion to €10 billion [$10 billion to $13.3 billion] in 5- and 10-year issuance,” Hall said.