On Tuesday, the dollar fell to a two-month low against a major currency index as Federal Reserve officials hinted that it might soon end its tightening cycle. At the same time, the British pound reached a 15-month high, driven by better-than-expected wage growth.
The dollar reached a four-week low against the yen, hitting a trough of 140.17. It decreased by 0.7 percent and was last traded at 140.385 yen.
The U.S. currency dropped to its lowest level in over two years compared to the Swiss franc, currently at 0.8797 francs, reflecting a 0.6 percent decline.
On Monday, Fed officials suggested raising interest rates might be necessary to address inflation. However, they also hinted that the central bank’s hawkish stance was nearing its end.
The remarks caused the dollar to decline to 101.66 against a basket of currencies. Traders adjusted their expectations regarding the extent to which U.S. rates might increase. As a result, the dollar index dropped by 0.3 percent to 101.65.
According to Matt Weller, global head of research at Forex.com and City Index, the nonfarm payrolls report on Friday unveiled possible weaknesses in the U.S. labor market, indicating that the Fed might have “to settle on just a single rate hike in the second half of the year.”
In June, the nonfarm payrolls report revealed the lowest increase in employment in the past two and a half years.
Weller mentioned that the current surge in U.K. wage growth and the persistent “short squeeze” affecting the Japanese yen contribute to the upward movement of the two major currencies against the dollar. This development comes as traders “anxiously await” the release of the U.S. CPI report on Wednesday.
Reuters said that market expectations point to a five percent year-on-year increase in core U.S. consumer prices during June. The upcoming CPI data will shed more light on the Fed’s endeavors to address the persistent issue of elevated inflation.
Euro rises to two-month peak
As discussed above, British wage growth reaching a joint record high prompted the sterling to reach an almost 15-month high of $1.2934. As a result, the Bank of England is under increased pressure to implement more rigorous measures to address inflation.
Meanwhile, the euro climbed to its highest level in two months, reaching $1.1027. It last traded at $1.1006, indicating a slight increase throughout the day.
Other European currencies also demonstrated strength. The Norwegian krone reached a nearly three-month high. The Swedish krona reached a two-week peak against the dollar.
The Japanese yen has increased by over three percent since hitting a seven-month low last month. Its decline below the monitored level of 145 per dollar put traders on high alert for potential intervention from Japanese authorities.
In other regions, the Australian dollar rose by 0.2 percent to reach $0.6697, while the Kiwi declined by 0.3 percent to $0.6197.
According to Matt Simpson, senior market analyst at City Index, the recent statement and minutes from the Reserve Bank of New Zealand maintained an overall “dovish tone.”
“But with an economy now in recession, it’s a relatively safe bet that we’ve seen the terminal rate,” Simpson said. “And that means the next theme for investors to obsess over is when the RBNZ will begin cutting rates.”