Dollar gains over oil output reduction plan

The dollar rose against other major currencies on Monday as fears over inflation resurfaced after a surprise announcement by major oil producers to cut production targets further, with traders wagering the Federal Reserve may need to increase interest rates again at its next meeting.

The announcement on Sunday by the Organization of the Petroleum Exporting Countries (Opec) and its allies of output target cuts caused oil prices to jump by around 8 per cent in early trade in Asia on Monday.

Opec+ had been expected at a meeting on Sunday to stick to cuts of 2 million barrels per day (bpd) already in place until the end of 2023, but instead announced further output cuts of around 1.16 million bpd.

"A higher oil price will put pressure on global inflation and if we assume the banking turmoil continues to reside then the markets will increasingly focus on the inflation outlook," said Mohamad Al-Saraf, Associate, FX and Rates Strategy at Danske Bank.

Markets are now pricing in around a 70 per cent probability of the Fed hiking rates by a quarter point in May, from around 50 per cent on Friday. But, by the end of the year, expectations are priced in for cuts of 40 basis points.

"With oil prices going up it could be a trigger to reverse Fed rate cut pricing," Danske Bank's Al-Saraf added.

The euro was last down 0.1 per cent to $1.0835, after touching a one-week low of $1.0788 earlier in the session, while the dollar rose 0.5 per cent to 133.57 Japanese yen, earlier hitting its highest level since March 17.

Sterling was at $1.2317, down 0.1 per cent on the day, while the dollar rose 0.3 per cent against the Swiss franc.

On Friday, a report from the US Commerce Department showed that the personal consumption expenditures price index rose 5.0 per cent in February from a year earlier, slowing from a 5.3 per cent increase in January. A measure of core inflation - seen as a better gauge of future price increases - came in a shade lower than expected at 4.6 per cent.

Additional data also showed US consumer sentiment fell for the first time in four months in February on concerns of an impending recession, although the impact of the banking crisis was muted.

Focus this week will be on US activity data and Friday's jobs report, although many markets will be closed for the Easter holiday.

"Any signs of weakness in the data will likely push dovish bets back higher after the recent big unwinding of rate-cut bets," said Francesco Pesole, FX strategist at ING.

"Solid data and hawkish Fed comments may help reinforce May Fed hike expectations," Pesole added, which he said could help build a floor in the dollar.

The risk-sensitive Australian dollar was last up 0.1 per cent to $0.6693 ahead of a policy meeting at the Reserve Bank of Australia on Tuesday, with markets placing around an 85 per cent chance the central bank will stand pat on interest rates after 10 interest rate hikes.

The kiwi slid 0.4 per cent to $0.6230.

In cryptocurrencies, bitcoin was down 1 per cent at $27,910. Ethereum, last fell 0.2 per cent to $1,792.