The U.S. dollar rose on Monday, recovering from significant losses at the end of last week due to signs of cooling inflationary pressures. Meanwhile, the euro declined following cautious comments by ECB President Christine Lagarde.

The dollar index, which tracks the U.S. currency against a basket of six other currencies, traded 0.4% higher at 107.750, bouncing back from a sharp drop on Friday when it retreated from two-year highs.

Dollar Rebounds After Sharp Drop

The dollar regained strength on Monday after Friday’s decline, which followed data showing the Federal Reserve’s inflation gauge posted a modest monthly increase in prices. Core inflation recorded its smallest rise in six months, easing fears about the Fed’s rate-cut trajectory for the upcoming year.

Concerns about aggressive rate cuts had grown following hawkish forecasts for U.S. interest rates after the Fed’s final policy meeting of 2024. Despite this, traders now estimate 38 basis points in rate cuts for next year, a reduction from the two 25-basis-point cuts projected by the Fed. The market anticipates the first easing in June, while a March rate cut is estimated at 53% probability.

With the year nearing its close, trading volumes are expected to thin, particularly given the shortened week due to the holiday season.

Eurozone ‘Very Close’ to ECB Inflation Target

In Europe, EUR/USD slipped 0.1% to 1.0414, hovering near the two-year low it touched in November and down 5.5% for the year. European Central Bank President Christine Lagarde hinted that the eurozone was approaching its inflation target.

“We are getting very close to that stage where we can declare that we have brought inflation sustainably to our medium-term target of 2%,” Lagarde said in an interview published by the Financial Times on Monday.

Earlier in December, Lagarde indicated the ECB could further reduce interest rates if inflation continued its decline towards the 2% target, stating that additional monetary tightening would no longer be necessary to curb growth.

Last week, the ECB cut its benchmark interest rate for the fourth time this year, with further cuts possible in 2025 if inflation pressures ease.

GBP/USD remained steady at 1.2571 after data revealed that the UK economy stagnated in the third quarter, underscoring signs of an economic slowdown.

The Office for National Statistics revised its GDP estimate for the July-September period to 0.0%, down from its previous forecast of 0.1% growth. Additionally, the second-quarter growth estimate was revised down to 0.4% from 0.5%.

Last week, Bank of England policymakers voted 6 to 3 to keep interest rates unchanged, reflecting a more dovish stance than anticipated due to concerns over a slowing economy.

Yuan Hits One-Year Highs

In Asia, USD/JPY edged up 0.2% to 156.72, after reaching a high of 158 the previous week, driven by cautious signals from the Bank of Japan.

The BOJ reiterated its stance against raising interest rates in the short term despite the recent rise in inflation. Policymakers hinted that any potential rate adjustments could be postponed until March 2025.

USD/CNY climbed 0.2% to 7.3080, reaching its highest level in a year amid concerns about China’s economic outlook. Although Beijing is expected to increase fiscal spending in 2025 to stimulate growth, the potential for looser monetary measures may exert additional pressure on the yuan.