The US dollar fell in early European trading on Wednesday after Federal Reserve Chairman Jerome Powell signaled progress toward lowering inflation, while the euro rose ahead of the second round of French parliamentary votes.
At 04:35 ET (08:35 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 105.287.
Dollar falls after Powell’s dovish comments
The dollar fell after comments made by the head of the US Federal Reserve on Tuesday during a conference in Portugal sponsored by the European Central Bank, which reinforced expectations that a cut in interest rates in the United States is not far away.
Powell said the Fed had made “significant progress” in returning the pace of price gains to 2%, noting that the labor market – the main driver of inflation – was showing signs of “slowing down,” with wage increases easing toward “more sustainable levels.”
“As we expected, he sounded upbeat on deflation, though he remained cautious on the next policy moves. Markets now expect 18bp of Fed easing by September, and 45bp in total by year-end,” ING analysts said in a note.
The U.S. Federal Reserve is due to release the results of its June monetary policy meeting later today, when the central bank left interest rates unchanged at the highest level in more than two decades and indicated it expected to cut borrowing costs only once this year.
Politics affects the euro
The euro rose 0.2% against the US dollar to 1.0762, with the euro continuing to be supported by data showing that the crucial services component of euro zone inflation remains stubbornly high, suggesting the European Central Bank may take its time before cutting interest rates again.
The ECB governor and ECB president are due to speak at a central bank forum in Portugal later on Wednesday, while eurozone June data, also due later, is expected to remain in expansionary territory.
The euro was also supported by news that opponents of France’s National Rally party had stepped up their efforts to prevent the far-right party from coming to power in Sunday’s run-off election.
The pound rose 0.1% against the US dollar to 1.2696, with the UK general election taking place on Thursday, with the opposition Labour Party widely expected to return to power.
The UK’s tight fiscal position means that any new government will have little scope to increase spending, potentially removing the catalyst for a weaker pound and keeping volatility contained.
Yen falls to 38-year low
In Asia, the Australian dollar rose 0.2% to 161.81, with the pair hitting a near 38-year high, as Japanese officials remained largely on the sidelines amid the risk of intervention.
Finance Minister Shunichi Suzuki said Tuesday that foreign exchange market movements are being closely monitored, but he stopped short of issuing a clear warning about intervention.
The Chinese yuan rose slightly against the US dollar to 7.2735, with the yuan falling to an eight-month low after its lowest reading since October.