As traders anticipated a slew of central bank interest rate announcements this week, including one by the Federal Reserve on Wednesday, the U.S. dollar weakened versus a basket of currencies on Tuesday.
The dollar index, which compares the value of the dollar to six important rival currencies, fell 0.07% to 105.01, not far from the six-month high of 105.43 reached on Thursday. Last week marked the index’s ninth consecutive week of gains, its best winning streak in almost a decade.
In recent weeks, resilient U.S. growth has supported a dollar recovery, but the gain will likely be put to the test by a barrage of data and Wednesday’s Fed interest rate decision.
Following a report that suggested the European Central Bank may soon begin considering how to drain some of the excess liquidity in the banking system, the dollar faced some pressure versus the euro on Tuesday, while the yen sank to close to 10-month lows against the euro.
The debate over the multi-trillion-euro pool of excess cash flowing through banks, according to a Reuters article on Monday citing six sources, is set to begin next month.
By decreasing the competition for deposits, the extra cash lessens the effect of ECB rate increases. It also causes certain central banks to pay large amounts of interest, which results in losses.
Following a brief ascent to as high as $1.0718 earlier in the morning, the euro was roughly unchanged at $1.06915.
However, some economists predict that the US dollar will continue to rise.
Head of FX analysis at Monex Europe Simon Harvey stated, “If we look at the price action, it has generally been peripheral stories that have weighed on the dollar, like the minimum reserves leak out of the ECB yesterday.”
When the more prevalent narratives of American exceptionalism and a more convincing higher for longer message from the Fed come back into play, Harvey predicted, “this will do little to weigh on the dollar.”
The CME FedWatch tool indicates that traders anticipate the Fed to hold rates at its forthcoming meeting; nonetheless, attention will be paid to the central bank’s forward guidance.
The Reserve Bank of Australia’s most recent policy meeting’s minutes, which hinted at future interest rate increases, led to a 0.43% increase in the value of the Australian dollar.
Investors increased their bets on further interest rate increases by the Bank of Canada as a result of hotter-than-expected inflation statistics, and the Canadian currency was trading 0.62% higher after strengthening to a six-week high against the U.S. equivalent on Tuesday.
As the BOJ gets ready to meet to debate monetary policy, the yen was last down 0.07% against the dollar at 147.70 per dollar.
The Japanese government intervened to support the yen last autumn when it was at its lowest point.
Even though Governor Kazuo Ueda fuelled rumours of an impending shift away from the central bank’s present policy stance, expectations are for the BOJ to retain its policy of extremely low interest rates and reassure markets that monetary stimulus will remain in place, at least for the time being.
Before the Bank of England makes its interest rate decision on Thursday, which is anticipated to result in the last rate increase of the current cycle, the British pound was 0.12% higher at $1.2399, trading close to three-month lows.