The dollar held close to a six-week peak against a basket of currencies in Asian trade on Wednesday, as the euro edged down to touch a fresh 2014 low on the diverging interest rate outlook for the US and eurozone. The dollar index, which tracks the greenback against a basket of six major rivals, was steady on the day at 80.773, not far from a Tuesday high of 80.837 touched on expectations that higher US interest rates are on the horizon.
Data issued on Tuesday showed US inflation was 0.3 percent in June, in line with most analysts' forecasts, though core inflation, excluding volatile food and energy prices, was just 0.1 percent, about half of what analysts had forecast. Despite the weaker-than-expected core inflation reading, market expectations that the US Federal Reserve is on track to continue tapering its bond purchase programme and then raise interest rates in the latter half of 2015 remained intact.
"The US will raise next year, while in Europe, by contrast, we might see more easing steps," Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank in Tokyo. The euro languished at multi-month lows against many of its peers, having moved decisively lower in the previous session with an eye-catching fall in the Swiss franc. The weaker euro dovetailed with expectations for the European Central Bank to ease policy further.
The common currency was treading water at $1.3465 after touching a fresh eight-month low against of $1.3458 earlier, while it also slipped about 0.4 percent against the Australian dollar to A$1.4271. Some traders noted a big buy order in dollar/Swiss franc from a real money fund had helped push the greenback up on the euro, cracking a big barrier in the $1.3475-$1.3510 zone.
The dollar was steady in Asia at 0.9022 francs, and crept slightly lower against its Japanese counterpart to 101.41 yen. Against the yen, the euro slid to its lowest in over five months to 136.46 yen and was last at 136.58 yen, bringing February's 2014 trough of 136.25 yen back in view.
Analysts at BNP Paribas noted the previously strong support for the euro from capital inflows has now been unwound, with purchases of foreign securities by European investors outweighing overseas demand for euro zone assets. "The gradual widening in interest rate differentials in favour of the US also adds to the argument that EURUSD has scope to fall further as we target 1.32 on our trade recommendation," they wrote in a note to clients.
The premium offered by two-year US Treasuries over German debt has widened to around 46 basis points, levels not seen since 2007. Investors' risk appetite began to return, with Asian shares rising to fresh three-year highs and US and European stocks closing higher on Tuesday even as investors continued to warily monitor simmering geopolitical tensions.
The European Union threatened Russia on Tuesday with harsher sanctions over Ukraine, while fighting around Gaza continued. The high-flying pound edged up about 0.1 percent to $1.7073, aiming back towards a six-year top of $1.7192 set last week. The Australian dollar added about 0.4 percent to buy $0.9432, after spiking to a nearly two-week high of $0.9439 on surprisingly high core inflation figures. Australian consumer prices rose only modestly last quarter but a higher-than-expected reading for a key gauge of underlying inflation was enough to dent market speculation of future rate cuts.