The dollar maintained a steady position near a six-week high in Asian trading on Thursday local time as investors eagerly awaited key economic data to gain insights into the direction of U.S. interest rates.
The dollar index — which assesses the U.S. currency against six major counterparts — edged up by 0.06 percent to 103.33. This figure followed a 0.2 percent dip on Tuesday, with traders consolidating positions ahead of the upcoming Federal Reserve policy meeting.
Recent data revealed an uptick in U.S. business activity for January, with the S&P Global flash composite output index rising to 52.3, signaling business growth. This positive trend, coupled with signs of easing inflation, influenced market sentiment.
Carol King, a currency strategist at the Commonwealth Bank of Australia, noted that the initial reading of fourth-quarter U.S. gross domestic product (GDP) is expected to reflect an economy resilient to significant interest rate hikes.
According to Reuter's survey, economists anticipate a two percent annualized increase in the U.S. GDP for the last quarter of 2023. Additional crucial data this week includes the personal consumption expenditure (PCE) data set to be released on Friday to measure inflation.
"Evidence of still robust U.S. economic activity, against the backdrop of weak European and Chinese growth, can keep the USD supported in our view," King said.
Next week, the Fed is likely to maintain its current stance. However, people will pay close attention to comments from Chair Jerome Powell to see if the central bank is considering cutting interest rates.
Traders have lowered their expectations for early and big rate cuts. The CME FedWatch tool shows a 41 percent chance of a cut in March, down from 88 percent a month ago. Markets are also expecting 130-basis-point cuts for the year, compared to 160 basis points at the end of 2023.
Meanwhile, the euro displayed weakness in anticipation of the European Central Bank's policy meeting scheduled for later in the day. The euro recorded a 0.07 percent decline, settling at $1.0875. Market expectations pointed toward the central bank keeping rates steady.
Asian currencies react to central bank moves
Shifting the focus to Asia, the offshore Chinese yuan saw a modest increase of 0.06 percent, reaching $7.1648 per dollar.
China's central bank made a significant announcement Wednesday of a substantial cut to bank reserves, injecting approximately $140 billion into the banking system. This move is seen as a strong signal of support for the country's delicate economy and the struggling stock markets.
The decision follows reports earlier in the week about a rescue package totaling $278 billion to stabilize the distressed stock markets.
"While these measures are likely to support the yuan and wider market sentiment in the short term, it is unlikely to be a silver bullet," said Kieran Williams, head of Asia FX at InTouch Capital Markets.
Williams emphasized that the yuan's outlook depends heavily on investor sentiment and suggested that without some kind of reduction in medium-term lending facility (MLF) or loan prime rate (LPR), the real rate would remain high and cause lingering confidence issues.
Meanwhile, the Japanese yen weakened by 0.16 percent, reaching 147.75 per dollar. This decline comes after the currency gained ground on Wednesday, as traders took note of the Bank of Japan's shift toward a more hawkish stance.
Bank of Japan chief Kazuo Ueda remarked Tuesday that the prospects of achieving the central bank's inflation target were gradually increasing. This statement has heightened expectations that Japan might soon move away from its ultra-loose monetary policy.