By Peter Nurse

- The U.S. dollar weakened in early European trade Monday, with risk sentiment boosted by hopes that loosening lockdowns in China can help global growth.

At 2:55 AM ET (0655 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.5% lower to 102.660, falling back from a two-decade high seen in the middle of May.

The safe haven dollar appears to have lost momentum with risk sentiment on the rise, boosted by the news that Shanghai, China’s commercial hub, is set to lift its city-wide lockdown and return to more normal life from June 1.

Additionally, Beijing authorized an unexpectedly large rate cut last week, which has been taken as a signal that the Chinese authorities are going to provide support to the world’s second largest economy.

“DXY [the dollar index] could correct a little lower to 102.30, but we see this as bull market consolidation, rather than top-building activity,” said analysts at ING, in a note. “Not until the Fed pours cold water on tightening expectations should the dollar build a top.”

USD/CNY fell 0.5% to 6.6592, with the pair continuing the slip after the yuan had its best week since late 2020 last week.

The risk-sensitive Australian and New Zealand dollars climbed to their highest levels in several weeks, with AUD/USD up 1.1% to 0.7111 and NZD/USD up 1.2% to 0.6467. 

Australia elected a new government on Saturday, but this is not expected to impact the Reserve Bank of Australia’s thinking regarding monetary policy. The Reserve Bank of New Zealand is expected to raise its benchmark cash rate by 50 basis points on Wednesday.

EUR/USD rose 0.5% to 1.0608, ahead of the release of the key German Ifo business climate index for May. 

GBP/USD climbed 0.7% to 1.2573, with the important U.K. housing market still showing strength. Asking prices for U.K. homes rose to a new record for a fourth straight month, according to data from real estate company Rightmove, rising 2.1% in May, the highest for the month since 2014. 

Attention later this week will turn to the release on Wednesday of the minutes of the last Federal Reserve, with traders looking for clues about whether the U.S. central bank can curb the most aggressive inflation in four decades without tipping the economy into recession.

The Fed has already hiked interest rates by 75 basis points since March and markets are pricing in 50 basis point rate hikes in June and July.