Investing.com – The US dollar fell in early European trading on Wednesday, retreating from recent highs as traders considered the possibility of coordinated official intervention, but the underlying tone remains positive.
At 05:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was trading 0.1% lower at 105.640, down from a five-month peak of 106.51 earlier this week. .
Dollar slips due to concerns about interventions
The dollar has been in high demand lately as strong US economic data and persistent inflation have prompted investors to drastically reconsider the chances of a speedy rate cut by the Federal Reserve.
Increased geopolitical tensions in the Middle East have also contributed to the dollar’s safe-haven appeal, pushing it to its highest level since November.
However, the dollar’s dramatic gains have led to sharp losses in other currencies, especially in Asia.
This resulted in the US, Japan and South Korea announcing they have agreed to “close consultations” on currency markets during their first trilateral financial dialogue on Wednesday – official statements on the potential for coordinated intervention.
“It may be too much to read into this a US endorsement of Asian currency intervention, but this new coordination between Japan and Korea does raise the prospect that both could intervene at the same time,” ING analysts said in a note. .
That said, fundamentals still point to further dollar strength.
“Any large-scale currency intervention could temporarily slow the dollar’s advance, although a reversal will require a significant change in current conditions,” ING added.
ECB is ‘crystal clear’ about the possibility of an interest rate cut in June
In Europe, yields rose 0.1% to 1.0677, adding to Wednesday’s 0.5% gain, leaving five-month highs earlier this month.
That said, these gains may only be temporary as the European Central Bank is expected to cut interest rates in coordination with the Federal Reserve in an effort to boost the region’s struggling economies.
The ECB has made it “crystal clear” that interest rates could be cut in June, ECB Vice President Luis de Guindos said earlier Thursday, but it is also clear that policy decisions beyond that remain up in the air.
Markets currently see a 75 basis point cut in the central bank’s 4% deposit rate this year, or two full steps beyond June.
climbed 0.2% higher to 1.2475 and traded just above a five-month low after Wednesday’s UK data rose by the weakest rate in two and a half years in March.
The governor of the Bank of England said earlier this week that Britain faces less inflation risk than the US, and “this begs the question why the market is pricing in the same amount of easing for both the Fed and BoE this year – 45bp.” ” That’s what analysts at ING say.
“We could see these expectations shifting in the coming months as more easing from the BoE is priced in.” This will be negative for sterling.”
Yen and yuan largely unchanged
In Asia, trading was largely flat at 154.38 after testing 34-year highs significantly above 154. The yen’s weakness also kept markets cautious about government intervention.
Japan’s consumer inflation data, due Friday, is expected to provide more clues about the likely path for the yen.
rose to 7.2389, also little movement after rising to five-month highs in recent weeks. Uncertainty over the Chinese economy kept traders favorably positioned against the yuan, while the People’s Bank took action to stem further losses in the currency.
