LONDON, June 14 (Reuters) – The dollar hovered near multi-week lows against the euro and British pound on Wednesday after unexpectedly soft US inflation data confirmed the view that the Federal Reserve will not raise interest rates later today.
The Chinese yuan fell to a 6 1/2 month low after the central bank cut rates, and as speculation mounts that more stimulus is on the way to support the sputtering post-COVID economic recovery.
The dollar index – which measures the US currency’s performance against six others – remained flat at 103.20 after hitting its lowest point since May 22 at 103.04 overnight.
In April, the US consumer price index (CPI) recorded its smallest annual increase since March 2021 at 4.0%.
The odds of the Fed raising rates by a quarter point have dropped below 5%, from about 21% a day earlier, according to CME Group figures. Fed Watch Tool.
“Going into the meeting, the market is expecting an aggressive stance – unless they surprise and raise all of us. It’s a pretty high hurdle for (the Fed) to deliver an aggressive surprise tonight through rhetoric alone,” MUFG strategist said Lee Hardman.
“For us, we think we still can’t completely rule out the possibility that the dollar could at least initially try to rise based on aggressive comments from the Fed or updates or projections,” he said.
The dollar index is heading for its biggest two-week fall in two months, after falling 0.8% in value in that time, as investors have begun to believe that while the Fed may be close to the end of its current rate of rate hikes, other central banks still have a long way to go.
The Reserve Bank of Australia and the Bank of Canada made surprise rate hikes last week, while the chance for the Bank of England to rise half a point next week is 20% after shocking wage growth data on Tuesday.
Unsurprisingly, the dollar has lost the most so far this month against the Australian dollar, which is up 4.3%, followed by the Canadian dollar, which is up 2%.
The euro steadily rallied from its 2-1/2 month lows at the end of May and was most recently flat at $1.0787. The European Central Bank (ECB) will make its decision on interest rates on Thursday, with a widely expected increase of a quarter point to 3.50%. Policymakers have made it clear that inflation in the Eurozone is too high and that the central bank has more work to do.
In terms of near-term impact, we expect the combination of an aggressive hold by the Fed and an aggressive 25 basis point hike by the ECB to push the euro closer to $1.0700 than $1.0800 traded,” said ING strategist Francesco Pesole.
“The ECB may have more difficulty delivering an aggressive message after inflation and growth data came in on the softer side.”
Sterling remained mostly flat at $1.2607, after rising 0.8% on Tuesday to a one-month high of $1.2625.
The dollar fell 0.2 to yen 139.90, retreating from a week-high the day before. The Bank of Japan is expected to maintain its ultra-easy policy settings on Friday.
Meanwhile, the Chinese yuan previously reached 7.1785, its weakest against the dollar since late November. It was last at 7.1686, showing a 0.1% gain against the dollar.
The People’s Bank of China cut key short-term interest rates for the first time in 10 months on Tuesday and is expected to cut borrowing costs on medium-term loans on Thursday, a Reuters poll showed.
Additional reporting by Kevin Buckland in Tokyo; Edited by Kim Coghill and Mark Potter