Written by Stefano Ribaudo
(Reuters) – The dollar rose ahead of key U.S. economic data on Wednesday, with investors also awaiting a monetary policy meeting in Canada that could trigger a cycle of interest rate cuts.
Investors are awaiting US services data on Wednesday, and more jobs numbers later in the week.
The US currency fell to its lowest level in nearly two months, as signs of a slowing US economy on Monday strengthened the case for the Federal Reserve to cut interest rates earlier.
The Bank of Canada meets a day before the European Central Bank meets on Thursday.
Canada's annual inflation rate slowed to a three-year low of 2.7% in April, leading financial markets to see an increased chance of interest rate cuts this month.
Markets expect a roughly 80% chance of a Canadian interest rate cut on Wednesday and a 65 basis point discount from policy easing by the end of the year.
“We believe the Bank of Canada is overdue, and the dovish pivot will have a common reading among smaller G10 countries, such as New Zealand,” said Themos Fiotakis, global head of foreign exchange strategy at Barclays.
The Canadian dollar hugged the middle of a months-long range at C$1.3683 to the dollar.
It rose by 0.19% to 104.36. It reached 103.99 on Tuesday, its lowest level since April 9.
“The key point is that markets are pricing in the Fed to cut interest rates by the same amount as the ECB,” Barclays' Fiotakis said.
“The difference in fundamentals is not priced in. However, the dynamics of growth and inflation will make the Fed less pessimistic than other central banks,” he added, saying he sees an opportunity for investors to buy the dollar.
Markets are also closely watching futures contracts, which were hovering near four-month lows on Wednesday.
“If lower oil prices cause disinflation to become a global phenomenon again, we would not expect further policy divergence, nor a weaker dollar, as this would lead to 'cautiousness' across the board,” said Terry Weisman, global FX strategist at Macquarie. place”.
The euro fell 0.1 percent to 1.086 against the dollar.
Analysts take for granted that the European Central Bank will cut its interest rate by 25 basis points this week, but are unsure about the interest rate outlook.
The yen fell about 0.8 percent to 155.90 per dollar, retreating from Tuesday's gains led by investors abandoning their bets in emerging markets.
Japanese real wages fell for the 25th straight month in April, as inflation outpaced rising nominal wages.
The central bank must be “extremely vigilant” about the impact a weak currency could have on the economy and inflation, Bank of Japan Deputy Governor Ryozo Himeno said on Tuesday.
Investors believe that the Bank of Japan will tighten its policy in the future, although this will not be enough to strengthen the yen.
The Australian and New Zealand dollars were virtually unchanged after local economic news proved less risky than investors had feared.
Emerging markets stabilized after a turbulent few days.
The Mexican peso stabilized after falling about 4% against the dollar and about 6% against the yen since the re-election of the ruling leftist Morena Party, and its coalition obtaining a two-thirds majority in both chambers of Congress.
Some analysts said expectations of more government control over the economy had affected the Mexican currency.
“President-elect Sheinbaum has pointed to responsible fiscal policies and central bank independence,” Macquarie's Wesman said, arguing that the Mexican asset sell-off appears overdone.
“The dust may soon settle, leading to a period of outperformance for the Mexican peso,” he added.
The Indian rupee recovered from its lowest levels in seven weeks after election results showed that voters returned Narendra Modi to power by a much smaller margin than expected.