The U.S. dollar saw a slight increase on Tuesday as traders anticipated the Federal Reserve’s policy decision on Wednesday.
The dollar index, which measures the greenback against six counterparts, increased by 0.05 percent to reach 105.13, staying close to the six-month peak of 105.43 achieved last Thursday. Last week, the U.S. saw the ninth consecutive week of gains, the lengthiest gaining streak in nearly ten years.
The dollar’s resurgence in recent weeks is attributed to the robust growth of the U.S. economy. The U.S. economy, measured by real GDP, grew between 2.0 and 2.4 percent in the year’s first half.
Consumer spending, which accounts for 65 percent of GDP, remained robust. However, if consumer spending decreases in the second half of the year, growth could slow by early next year. JPMorgan has projected that the real GDP will grow at two percent in the second half of 2023 and 0.5 percent in the first half of 2024.
Traders anticipate the Fed to maintain its current interest rates at the upcoming meeting. Analysts say the main interest point will revolve around the central bank’s forward guidance. Despite the recent dollar strengthening, it might require a new catalyst to propel it further.
“The Fed may not sound dovish but markets may need quite a lot more supportive evidence to push an expensive looking USD even higher at this point,” Scotia Bank chief currency strategist Shaun Osborne told Reuters.
Euro dips, yen stays at its lowest
Earlier in the trading session, the dollar weakened against the euro after a report suggested that the European Central Bank (ECB) might initiate discussions about reducing excess liquidity in the banking system. The euro eventually dipped by 0.1 percent to $1.06805 after reaching a peak of $1.0718 earlier in the day.
According to sources, there were discussions regarding the massive pool of excess liquidity in commercial banks — amounting to trillions of euros — expected to commence next month.
The surplus cash diminishes the effectiveness of the ECB’s interest rate increases by lowering the competition for deposits. It led to substantial interest payments and subsequent losses for certain banks.
Simon Harvey, the head of FX analysis at Monex Europe, observed that peripheral stories influence the dollar’s performance. This includes recent events like the ECB’s minimum reserves leak, which can be discerned from the price action.
Japanese yen remained at its lowest point against the dollar in ten months since last autumn, when Japanese authorities took measures to support its value. The yen traded at 147.85 per dollar, declining by 0.16 percent.
The Bank of Japan (BoJ) is gearing up for its upcoming monetary policy meeting scheduled for Friday. Expectations point to the BoJ keeping low interest rates and assuring markets that monetary stimulus will continue, at least for the time being. Nevertheless, Governor Kazuo Ueda has fueled speculation about a potential shift from the central bank’s current policy stance.
Meanwhile, the British pound increased by 0.08 percent to $1.2395, close to its three-month lows. It came ahead of the Bank of England’s (BoE) impending interest rate decision. The market expects the BoE to deliver its final rate increase on Thursday.
Elsewhere, the Australian dollar saw a 0.31 percent increase following the release of the minutes from the Reserve Bank of Australia’s recent policy meeting. It indicated the likelihood of further interest rate hikes.
The Canadian dollar, which had previously reached a six-week high against the U.S. dollar on Tuesday, traded 0.35 percent higher. This rise came as investors increased their expectations of more interest rate hikes by the Bank of Canada (BoC), prompted by inflation data that exceeded expectations.