Investing.com – The US dollar rose in early European trade on Wednesday, rebounding from two-month lows before more clues on future monetary policy emerged.
At 03:40 EDT (08:40 GMT), the dollar index, which tracks the US currency against a basket of six other currencies, rose 0.2% to 104.265, after falling below 104 for the first time since early April in Earlier this week.
The dollar's strength is likely to continue
The dollar has risen more than 3% this year, much of this strength stemming from economic strength and steady inflation that has kept interest rates at high levels for longer than previously expected.
At the start of the year, traders expected the US Federal Reserve to cut interest rates at least once by now, while the latest interest rate futures now suggest the Fed will begin easing policy in September.
The closely watched US monthly report is due on Friday, but inflation is likely to be a more important variable in determining Fed policy.
The Fed's preferred report, released last week, showed inflation at 2.7%, well above the Fed's target of 2.0%, suggesting the dollar may remain strong for an extended period.
“We think US inflation could rise again by mid-year and that the Fed's monetary easing cycle may be very short indeed, almost regardless of when it starts,” said Jane Foley, head of foreign exchange strategy at Rabobank.
“This means that even though the dollar will give back some of its gains, when the Fed starts cutting interest rates, the dollar will likely remain relatively flat. It will not give up much of this year's gains and will remain overvalued.”
Euro weak despite Eurozone PMI data
In Europe, trading fell 0.1% to 1.0873, even after data showed that business activity in the euro zone expanded at its fastest rate in a year in May.
The HCOB index rose to 52.2 in May from 51.7 in April, its highest level since May 2023.
Although it was slightly lower than the initial estimate of 52.3, it remained above the 50 mark that separates growth from contraction for the third month in a row.
The Fed meets on Thursday, and markets are pricing in a 95% chance of a cut.
It rose 0.1% to 1.2776, after the UK's May index came in at 53.0, a slight decline from the 54.1 seen the previous month, but still above the critical 50 mark.
The bank holds a pivotal monetary policy meeting later this month, and traders are awaiting clues as to when the interest rate cutting cycle will begin.
Yen remains weak ahead of Bank of Japan meeting
In Asia, it traded 0.8% higher at 156.10, with the yen falling despite Japan's average cash income rising 2.1% in April, as did gross employee wage income, with both indicators reflecting wage increases won by Japanese trade unions. Major earlier this year.
The bank is expected to reduce some asset purchase policies at next week's meeting.
Its index rose 0.1% to 7.2466, although data showed that the country's services sector grew more than expected.