© Reuters. FILE PHOTO: US dollar banknotes are shown in this illustration taken on March 10, 2023. REUTERS/Dado Rović/Illustration/File photo
By Amanda Cooper
LONDON (Reuters) – The dollar swung around multi-week lows against the euro and sterling on Wednesday, after unexpectedly weak US inflation data reinforced the view that the Federal Reserve will not raise interest rates later in the day.
China’s yuan fell to its weakest level in more than six months after the central bank cut interest rates, and as speculation mounts, more stimulus is on the way to support the faltering post-COVID economic recovery.
It – which measures the greenback’s performance against six others – fell 0.2% to 103.14, after touching its lowest since May 22 at 103.04.
In April, the US Consumer Price Index (CPI) recorded its smallest year-on-year increase since March 2021 at 4.0%.
Chances of the Federal Reserve raising rates by a quarter point have fallen to less than 5%, from about 21% a day earlier, according to CME Group’s FedWatch (NASDAQ:) instrument.
“Going into the meeting, the market is expecting a hawkish commentary – unless they surprise us all and drive the rate up. It’s a big hurdle for (the Fed) to deliver a hawkish surprise tonight through rhetoric alone,” MUFG strategist Lee Hardman told me.
“For us, we think we still cannot rule out that the dollar may at least try to rally initially on the back of hawkish comments from the Fed or from updates or expectations,” he said.
The dollar index is heading for its biggest two-week drop in two months, having lost 0.8% in value in that time, as the view spreads among investors that, while the Federal Reserve may be near the end of its current trajectory. Raising interest rates, other central banks have more to go.
The Reserve Bank of Australia and the Bank of Canada last week delivered surprising rate hikes, while the chances of the Bank of England delivering a half-point increase when it meets next week reached 20% after Tuesday’s surprise wage growth data.
Unsurprisingly, the dollar has posted the most losses so far this month against the Australian dollar, which is up 4.3%, followed by the Canadian dollar, which is up 2%.
The euro has been steadily declining from 2-1/2 month lows in late May and was last up 0.1% at $1.0805. The European Central Bank (ECB) will release its decision on interest rates on Thursday, with a quarter-point rise to 3.50% expected broadly. Policy makers have been clear that inflation across the eurozone is very high and that the central bank has more work to do.
“In terms of the short-term impact, we expect a combination of a hawkish stance by the Fed and a hawkish 25 basis point increase by the ECB to leave the euro trading near $1.0700 from $1.0800,” said Francesco Pessol, strategist at ING.
“The ECB may struggle more to deliver an optimistic message after inflation and growth data came out on the softer side.”
Sterling rose 0.3% to trade at a one-month high of $1.265, on track for a 1.1% gain over the past two days.
The dollar fell 0.14 percent to 139.98 yen, down from a one-week high the previous day. The Bank of Japan is expected to hold the very easy policy setting on Friday.
Meanwhile, it hit 7.1785 earlier, which is the weakest level against the dollar since late November. It was last at 7.167, showing a gain of 0.1% against the dollar.
The People’s Bank of China cut its main short-term lending rate for the first time in 10 months on Tuesday, a Reuters poll showed, and is widely expected to cut the cost of borrowing on medium-term loans on Thursday.
(Additional reporting by Kevin Buckland in Tokyo; Editing by Kim Coghill, Mark Potter and Chizu Nomiyama)
