The euro held near a three-week low against the dollar on Wednesday as investors trimmed expectations of aggressive rate cuts from the U.S. Federal Reserve later this month, pushing U.S. Treasury yields and the greenback higher.
Expectations of easier monetary policy from U.S. policymakers soared last month and traders were waiting to see if Fed Chair Jerome Powell would give more clues on its plans during Congressional testimony starting on Wednesday.
"The Fed is headed for a rate cut, but expectations surrounding the speed and scale of cuts had gotten out of hand," said Tsutomu Soma, general manager of fixed income business solutions at SBI Securities in Tokyo.
"Now we're scaling things back. U.S. economic data is not as bad as Europe or other countries. This will support the dollar."
Expectations for a 50 basis point rate cut at a Fed meeting later this month have evaporated, but investors still expect a 25 basis points cut due to weak inflation and worries about growing business fallout from the U.S.-China trade war.
The euro was last flat at $1.1211, not far from the $1.1194 low, losing 1.3% of value against the greenback in the past couple of weeks.
A broad index that tracks the greenback's performance against six other major currencies was at 97.503 after touching 97.588 on Tuesday, which was the highest since June 19.
"Coming off the back of a stronger than expected jobs report Chairman Powell is unlikely to paint as grim a picture as what is currently priced into the financial markets," said Derek Halpenny, currency strategist at MUFG.
"So the risk today is toward U.S. rates moving a little higher and the dollar strengthening modestly further in response."
Yields on benchmark U.S. Treasury yields edged up to a three-week high of 2.11%, breaking a two-month falling streak and supporting the dollar.
Analysts said the dollar should benefit if Powell's comments on the U.S. economy are perceived as neutral or even slightly hawkish, which would support the argument that additional rate cuts will be limited.
While expectations of a quarter point rate cut is firmly baked into the market, hopes of a 50-basis point cut has dropped to zero from nearly 20% a month ago, according to CME's Fedwatch.
Sterling was little changed at $1.2466, close to $1.2439, the lowest it's been since April 2017.
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