Investing.com – The U.S. dollar rose in early European trading on Wednesday, bouncing off two-month lows ahead of more clues about future monetary policy.
At 03:40 ET (08:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.2% to 104.265 after falling below the dollar for the first time since early April earlier this week. 104 had dropped.
The strength of the dollar is likely to continue
The dollar is up more than 3% this year, with most of this strength coming from economic strength and persistent inflation, keeping interest rates at high levels for longer than previously expected.
At the start of the year, traders had predicted that the US Federal Reserve would have cut rates at least once by now, while the latest interest rate futures now suggest the Fed will start easing policy in September.
The closely watched monthly U.S. interest rate is due Friday, but inflation will likely be a more important variable in determining Fed policy.
The Fed Preferences Report, released last week, showed inflation at 2.7%, well above the Fed’s 2.0% target, suggesting the dollar could remain strong for an extended period.
“We think US inflation could pick up again by mid-year and the Fed’s easing cycle could be really short, almost regardless of when it starts,” said Jane Foley, head of FX strategy at Rabobank.
“That means that even though the dollar may give back some ground, it will likely remain relatively firm as the Fed begins to cut spending. The dollar will not give back many of this year’s gains and will remain overvalued.”
Euro weak despite Eurozone PMI data
In Europe, trading was 0.1% lower at 1.0873, even after data showed eurozone business activity grew at its fastest pace in a year in May.
HCOBs rose to 52.2 in May from 51.7 in April, the highest level since May 2023.
Although the index was slightly below the preliminary estimate of 52.3, it remained above the 50 mark that separates growth and contraction for the third month in a row.
They meet on Thursday and markets estimate a 95% chance of a cut.
rose 0.1% to 1.2776, after the UK May reading of 53.0, down slightly from the previous month’s 54.1, but still above the critical level of 50.
The ECB will hold a potentially crucial policy meeting later this month, and traders are watching for clues as to when the rate-cutting cycle will begin.
The yen remains weak ahead of the BOJ meeting
In Asia, trading rose 0.8% to 156.10, with the yen falling despite average Japanese cash earnings growing 2.1% in April, as did total employee wage income, with both indicators reflecting higher wages the major Japanese unions achieved earlier this year.
The country is expected to scale back some of its asset-buying policies at a meeting next week.
traded 0.1% higher at 7.2466, even as data showed the country’s services sector grew more than expected.
