Euro nears nine-month peak as ECB hawks let fly

The dollar was staring at a fourth straight session of losses against the euro on Monday as more hawkish comments on European interest rates contrasted with market pricing for a less aggressive Federal Reserve.

The euro crept ahead to $1.0870 and nearer its recent nine-month peak of $1.08875. A break there would open the way to a spike top from last April at $1.0936.

It was aided by European Central Bank (ECB) governing council member Klaas Knot, who said interest rates would rise by 50 basis points in both February and March and continue climbing in the months after.

Knot is considered a hawk among policy makers and the comment was taken as push back against recent reports that the ECB would scale back to quarter-point moves from March.

In contrast, futures have priced out almost any chance the Fed could move by 50 basis points next month and have steadily lowered the likely peak for rates to 4.75% to 5.0%, from the current 4.25% to 4.50%.

Investors also have around 50 basis points of U.S. rate cuts priced in for the second half of the year, reflecting softer data on inflation, consumer spending and housing.

Flash surveys on January manufacturing due this week are forecast to show more improvement in Europe, in part thanks to falling energy costs, than in the United States.

"The U.S. has lost its global growth leadership position if most recent PMI surveys are to be believed," said Ray Attrill, head of FX strategy at NAB. "Meanwhile, gas prices have fallen by 60% since early December, sharply reducing the negative terms of trade shock weighing on the Eurozone/EUR."

"Additionally, U.S. inflation is seen falling further and faster than the Fed's own projections," he added. "Under this scenario, the USD has scope to fall much further this year."

Attrill now sees the euro reaching $1.1000 by March and $1.1700 by year end.

Much the same argument goes for sterling, with markets wagering the Bank of England will hike by half a point to 4.0% at its policy meeting next week.

The pound was up at $1.2410 and within striking distance of last week's top of $1.2435.

The dollar was thus a shade weaker against a basket of currencies at 101.890 and just a whisker for its recent eight-month trough of 101.510.

The dollar has at least managed to steady on the yen after the Bank of Japan (BOJ) defied market pressure to reverse its ultra-easy bond control policy.

Analysts assume the BOJ will stand the line until at least the next policy meeting in March, though one hurdle will be the expected naming of a new BOJ governor in February.

Any hint the replacement is less dovish than current governor Haruhiko Kuroda could see the yen climb anew.

For now, the dollar was holding at 129.40 yen, following last week's wild gyrations between 127.22 and 131.58.

The focus on interest rates will make the Bank of Canada's meeting on Wednesday of some note, with markets leaning toward another quarter-point hike to 4.5%, but that to be the end of the tightening cycle there.

The Canadian currency was a touch firmer at $1.3374 per U.S. dollar, having bounced from $1.3497 on Friday when local data on retail sales proved a lot less weak than expected.