The dollar stayed pinned near 6-1/2-month lows on Wednesday, investors' focus shifting from US politics to monetary policy after comments from a Federal Reserve official rekindled expectations of an interest rate hike next month. Diminishing expectations of a promised fiscal boost to the US economy from President Donald Trump and a resurgent euro have erased nearly all of the dollar's gains since the US leader's election in November.
But the greenback got a boost this week after the head of the Philadelphia Fed, Patrick Harker on Tuesday reiterated his support for a total of 3 rate rises this year, adding that a rate hike in June was a "distinct possibility". The dollar index, which measures it against a basket of peers, remained well above its November lows in European trade on Wednesday, up 0.1 percent at 97.363 as traders awaited minutes from the Federal Reserve's latest meeting, due at 1800 GMT.
Richard Falkenhall, currency strategist with SEB in Stockholm, said a hawkish tilt in the Fed's last monetary policy statement had altered market expectations significantly towards a June hike. "People may have the view that the minutes also can be tilted towards the hawkish side. I think that could be a temporary thing supporting the dollar right now," he said.
Recent US data has been sub-par, with Citi's Economic Surprise Index for the US at its lowest level since February 2016, indicating that data has been coming in under market expectations. That could temper expectations from the Fed for a June hike, although the Fed noted in its last statement that the weakness from data would be "transitory". The dollar was marginally lower against the euro, which has enjoyed a bull run this month on factors including an ebb in French political concerns, upbeat euro zone data, and a widening German-US government debt yield spread.
The euro was up less than 0.1 percent at $1.1192, having scaled a 6-1/2-month h2igh of $1.1268 on Tuesday. It fell to an 8-day low against the Swedish crown after the Swedish central bank called on regulators to introduce a leverage ratio requirement on the country's banks. Earlier, Moody's Investors Services downgraded China's long-term local and foreign currency issuer ratings by a notch, citing expectations that the financial strength of the world's second-biggest economy would erode in the coming years.
China's offshore yuan slipped in a knee-jerk reaction but the overall response was limited. The yuan fell to 6.8897 per dollar, down by 0.1 percent. The Australian dollar, sometimes used as a proxy of China-related trades, eased slightly but reaction to the downgrade was also relatively subdued. The Aussie was down less than 0.1 percent at $0.7472. "The downgrade is just one notch and Chinese paper remains investment grade," Rabobank said in a note.
"However, it is another negative signal that will serve to reinforce the message provided by a host of recent headlines regarding the risks surrounding Chinese debt. For the economies that export heavily into China, the impact of a shock related to a bursting of a debt bubble could be grave."