The dollar languished near a two-month low against a basket of currencies on Wednesday as investors wagered the US central bank will recommit to its aggressive stimulus programme, or even possibly expand it. The dollar index was at 81.726, after having fallen to a low of 81.598 on Tuesday. The break below 81.744, the 38.2 percent retracement of its January-April rally, has opened the way to 81.204, the 50 percent retracement level.
An unexpected contraction in the US Midwest business activity data on Tuesday fanned expectations of slowdown in the US economy sparked by a run of soft data in recent weeks, even though figures on US home prices and consumer confidence were robust. This data came as Federal Reserve policymakers gathered for their monthly two-day meeting amid talk the central bank might have to add more stimulus to help broaden a still-patchy economic recovery.
"We see the risks as titled on the dovish side as the Fed is now effectively falling short on both its employment and inflation objectives," said Vassili Serebriakov, strategist at BNP Paribas. The dollar drifted lower on the yen to 97.28, about 0.1 percent below the late US levels after having hit a two-week low of 96.99 yen the previous day.
"At the moment, the market is considering the 97-100 yen range. But if upcoming US economic data continues to disappoint, there's risk the dollar/yen's trading range will ratchet down to say 95-98," said Yoshio Takahashi, analyst at Barclays Capital in Tokyo. The greenback lost ground against the euro, which climbed to a two-week high near $1.3187 on Tuesday and last stood at $1.3166, flat from late New York levels. The common currency now faces tough resistance around $1.3200, a level that capped it last month.
The euro's strength has surprised markets because euro zone data has been as disappointing as the US indicators. The euro's strength added to pressure for a cut in interest rates by the European Central Bank on Thursday. But some analysts said that while a rate cut could see the euro initially fall, announcing further easing measures would be interpreted as a positive move by the central bank and this could lend the euro support.
The Australian dollar stayed near a two-week high of $1.0386 hit on Tuesday. It stood little changed at $1.0371, unable to extend gains after China's official purchasing managers' index (PMI) fell slightly despite economists' forecast of a small uptick. The PMI, however, remained in expansion territory. The Aussie appeared to be gearing up for another go at stiff resistance seen near $1.0400, an area containing several key chart levels including the 50 percent retracement of its April 11-23 decline.