The Dollar Recovers Slightly After Recent Declines
The dollar found itself in a weakened position on Wednesday following significant losses against the euro and sterling. Meanwhile, the yen remained near 34-year lows, despite increased warnings from Japanese officials about potential intervention.
The dollar’s overnight losses were driven by strong European economic data and a cooling in U.S. business growth. The Australian dollar capitalized on the dollar’s weakness and surged in early Asian trading on Tuesday, buoyed by higher-than-expected consumer price data.
Climbing 0.45% to $0.65185, the Aussie reached its highest level since April 12 in response to the data. Over the past two days, it had already rebounded more than 1% from a five-month low.
The inflation report reinforced expectations that the Reserve Bank of Australia would not rush into policy easing. “This overshoot likely removes any chance of RBA cuts this year,” said James Kniveton, senior corporate FX dealer at Convera, although he cautioned about lingering geopolitical risks.
The U.S. dollar index, which measures the dollar against six major currencies including the euro, sterling, and yen, dipped 0.07% to 105.60 in early Asian trading after a 0.4% decline overnight, reaching its lowest level since April 12.
The euro rose 0.11% to $1.071125, building on Tuesday’s 0.45% rally, driven by data showing accelerated business activity in the euro zone, especially in services. Sterling also gained from overnight data indicating rapid growth in British business activity, with Bank of England Chief Economist Huw Pill suggesting interest rate cuts were not imminent.
In contrast, U.S. business activity cooled in April to a four-month low due to weaker demand, with inflation rates easing slightly. This might provide some relief for the Federal Reserve, with the upcoming release of the Fed’s preferred consumer inflation measure, the PCE deflator, expected to be a major test.
Despite the dollar’s broader struggles, it briefly reached a fresh 34-year high against the yen at 154.88. Traders are cautious as the pair oscillated within a narrow range this week, wary that a push above 155 could trigger dollar-selling intervention by Japanese officials. Finance Minister Shunichi Suzuki issued a strong warning about intervention, indicating Tokyo’s readiness to act against excessive yen movements.
The Bank of Japan is expected to maintain policy settings and bond purchase amounts at its upcoming meeting, despite having recently raised interest rates for the first time since 2007. Japan’s cautious approach has limited yen strengthening, with any intervention carrying risks for the credibility of Japanese authorities, according to Rabobank strategist Jane Foley.
She noted that historically, FX intervention is most successful when supported by favorable fundamentals. “USD/JPY may not turn lower until the summer, assuming the Fed cuts rates in September,” she added.
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