© Reuters. FILE PHOTO: US dollar banknotes are shown in this illustration taken on March 10, 2023. REUTERS/Dado Rović/Illustration/File photo
Written by Harry Robertson and Ray Wei
LONDON/SINGAPORE (Reuters) – The dollar fell slightly on Thursday but remained near three-month highs after a surprise rate hike from the Bank of Canada indicated that other central banks, including the Federal Reserve, may have more to do. Work to be done to combat inflation.
The euro rose 0.1% to $1,071 in the early European session against the dollar – the most traded currency pair in global markets.
That helped push the euro, which measures the currency against six of the major currencies, down very slightly to 104. Still, it remained close to last week’s peak of 104.7, which was the highest since March 15th.
The dollar was on edge on Wednesday but rose against the euro and the Japanese yen after the Bank of Canada surprised traders by raising interest rates to 4.75%. This came after an interest rate hike by the Reserve Bank of Australia on Tuesday.
“The view here was that if both Australia and Canada felt the need for further increases, the Fed would likely do so as well,” Chris Turner, head of markets at ING, said in a note to clients, referring to the US Federal Reserve.
Against the Canadian dollar, the US dollar fell 0.16% to 1.335 Canadian dollars, after falling 0.24% on Wednesday.
The Australian dollar rose 0.43% to $0.668, bringing its monthly gain to almost 2.7%. The British pound rose 0.1% to $1.245.
The Canadian decision put the spotlight back on the Federal Reserve, which sets interest rates on Wednesday next week.
According to derivatives market pricing, traders currently believe there is a 70% chance that the Fed will hold rates next week, and a 30% chance of a 25 basis point (bp) increase.
They believe the Fed could raise interest rates by 25 basis points in July, after policymakers hinted at a so-called skip. That would raise the federal funds rate to a range of 5.25% to 5%.
The European Central Bank sets interest rates on Thursday and traders widely expect a 25bp hike, followed by another 25bp hike in July, with rates raised to 3.75%.
In Asia, the dollar was down 0.29% against the Japanese yen at 139.76 yen per dollar after rising 0.37% the day before.
The local market fell to its weakest level in six months against the dollar, weighed down by more pressure from economic concerns.
Data released on Wednesday showed that China’s exports contracted much faster than expected in May, while imports extended declines, raising doubts about the country’s fragile economic recovery.
“To some extent, this is a view that trade data is another symptom of a faltering recovery,” said Ray Attrell, head of foreign exchange strategy at National Australia Bank (OTC:).
Meanwhile, the Turkish lira fell to a record low of 23.39 per dollar in early Asian trade. And he remained under pressure, finishing last at 23.37.