The dollar fell slightly in early European trade Wednesday, but it remains around a two-decade high ahead of the release of critical inflation data that might affect Fed policy.
The Dollar Index, which measures the value of the dollar against a basket of six other currencies, fell 0.2 percent to 103.715 at 3:10 a.m. ET (0710 GMT), although it remained close to the high of 104.49 achieved at the start of the week for the first time since December 2002. EUR/USD increased by 0.2 percent to 1.0551, stabilizing after sliding to a more than the five-year bottom of 1.0469 at the end of last month, while GBP/USD increased by 0.1 percent to 1.2339, rising above the 22-month low of 1.2262 reached the start of the week.
“Markets are favoring low-yielding currencies, such as the pro-cyclical euro and pound,” according to ING analysts. “However, sustained market volatility in sentiment is unlikely to create any other winners outside of the dollar.” Later in the afternoon, traders will be searching for any signals that inflation is starting to fall by looking at the April U.S. consumer price index data. The indicator is predicted to improve by 8.1 percent on an annual basis, compared to a gain of 8.5 percent in March. Last week, the Federal Reserve raised its benchmark overnight interest rate by 50 basis points, the highest increase in 22 years, and policymakers have been quick to point to additional hikes of this magnitude in the future, but not greater.
In an interview earlier this week, Atlanta Federal Reserve President Raphael Bostic stated, “I would say that (a 75-basis-point rate rise) is a low likelihood result given what I expect to happen in the economy over the next three to four months.” However, some in the market are still hoping for a one-time large interest rate hike to allow the Fed to go ahead of the curve in terms of monetary policy tightening.