NEW YORK: The dollar index and the euro both slipped on Thursday in choppy trading as investors waited on a speech by Federal Reserve Chairman Jerome Powell on Friday for further clues about the ongoing pace of the US central bank’s rate hikes.
Investors are tossing up between the likelihood of a 50 or 75 basis point rate increase in September as the Fed battles inflation, but also faces some softening US economic data.
“It seems to me that markets are maybe expecting a hawkish message from Powell,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.
However, “since the last FOMC the numbers out of the US have not really been all that good. I think with gasoline prices in the US coming down quite significantly there is the view that inflationary pressures may well have peaked,” Osborne said.
Kansas City Fed President Esther George said it was too soon to predict by how much the US central bank would raise interest rates next month, with key reports on inflation and the labor market still to come.
Atlanta Fed President Raphael Bostic also said he hasn’t decided if the Fed should increase interest rates by 50 basis points or 75 basis points at its policy meeting next month.
Fed funds futures traders are pricing in a 59% chance that the Fed will hike rates by another 75 basis points at its September meeting, and a 41% probability of a 50 basis point increase.
The dollar index was last down 0.05% at 108.57. It is holding just below a 20-year high of 109.29 reached in on July 14.
The currency edged higher after data on Thursday showed that the US economy contracted at a more moderate pace than initially thought in the second quarter.
The euro fell 0.04% against the greenback to $0.9964.
The single currency briefly rose back above parity overnight, before retracing after the release of a closely watched index showing business morale in Germany in August had fallen to its lowest since June 2020.
The euro/dollar’s direction this week has largely been driven by soaring natural gas prices, which are correlated with a weaker euro because of the region’s dependence on gas for its energy needs. That, plus worries about the global economy had sent investors into dollars earlier this week.
The Australian dollar was lifted after a Chinese state media report said that China will take more steps to support the economy, including increasing funding support for infrastructure projects and ramping up support for private firms and technology companies.
The Aussie gained 0.72% to $0.6955.
China’s yuan also rebounded from a two-year low against the dollar as official guidance was set at a firmer than expected level.
Market participants said the guidance could be a sign that authorities are becoming increasingly uncomfortable with rapid losses in the yuan, which has fallen about 1.6% against the dollar so far in August.
“How the yuan performs can at the margin affect how the dollar trades more broadly against the majors, so that’s something to certainly keep an eye on in the short run at least,” said Osborne.
The dollar was last down 0.13% against the Chinese currency at 6.8641.
The greenback also dipped 0.22% against the Japanese yen to 136.81.
The Bank of Japan must maintain massive monetary stimulus and its dovish policy guidance until wages show clearer signs of increasing, one of its board members said, reinforcing the central bank’s outlier status in a global wave of monetary tightening.