The dollar edged lower in Asian trading on Tuesday local time as investors anticipated new economic data from the U.S.
The U.S. dollar index, which tracks the currency’s performance against six major peers, declined by 0.17 percent to 103.40. The index hit 103.24 in the previous forex trading session, the lowest in three weeks.
The British pound gained 0.16 percent to trade at $1.25315. The currency hit a one-month high of $1.2600 in the prior season after Bank of England (BoE) officials indicated further interest rate hikes as inflation in the country remained “sticky.”
The euro hit a three-week peak of $1.0792 against the U.S. dollar. Analysts said investors were anticipating the European Central Bank’s (ECB) policy rate decision on Thursday. Rabobank head of FX strategy Jane Foley predicted a 25-basis-point hike by the ECB. She also said the market was assessing the terminal key rate for this tightening cycle and how long the rate would stay at that level.
“It is widely assumed that the ECB is closing in on the end of its rate hiking cycle meaning that the market will be trying to evaluate not just how high rates will go, but how long they will remain at their peak.”
Jane Foley, Rabobank head of FX Strategy
Against the Japanese yen, the greenback slid 0.06 percent to trade at 139.52. The Bank of Japan (BoJ) will announce its rate policy decision this Friday. Analysts expect the BoJ to stick with its ultra-low rate policy and yield curve control this month. However, Standard Chartered Bank Korea researcher Chong Hoon Park said the BoJ could change its yield curve control policy in July without “signaling ahead.”
The Chinese yuan hit a six-month low in onshore and offshore trading. The onshore yuan hit its lowest in more than six months at 7.1680 per dollar, while the offshore counterpart declined by 0.2 percent to 7.1709.
The People’s Bank of China lowered its short-term lending rate to increase market confidence and support post-pandemic recovery. Analysts at financial firm ANZ said structural reforms contributed to China’s economic slowdown. They also said the monetary easing was an effort to engineer a “soft landing” in China.
Elsewhere, the Australian dollar strengthened by 0.23 percent to trade at $0.6766. The Aussie breached a one-month high of $0.6774 in the previous trading session. New Zealand’s dollar traded flat at $0.6126, close to its three-week high of $0.6153, breached on the day before.
Market eyes Fed’s rate policy
Analysts say the upcoming Federal Open Market Committee meeting will determine the dollar’s trend in the forex market. Fed fund futures forecast an over 70 percent chance that the U.S. central bank will hold the interest rate steady on Thursday. The fed fund rate currently stands at 5.00 to 5.25 percent.
Monex USA FX trader Helen Given pointed out low volatility across most major markets ahead of the Federal Reserve’s policy meeting. Given said investors did not want to “be caught on the wrong side of the market” if the Fed decided to hike the benchmark rate.
“A hike Wednesday would likely be very dollar-positive as it would go against current market expectations,” said Given.
Fed officials have said they will track recent updates in the U.S. economy to determine whether a rate hike will be “appropriate.” The government will publish the consumer price data for May on June 13. Experts predict headline consumer price inflation to hit four percent on an annual basis. Core consumer prices, excluding energy and food, will likely hit 5.3 percent.
The producer price index (PPI) for May is also due on June 14. Producer price data in April showed inflation had slowed in the goods sector, with PPI excluding food, energy and services sitting at 3.4 percent year-over-year. Analysts warn that a rebound in the services sector may prompt the Fed to maintain a high interest rate for longer.