Dollar Dips to One-Month Low Versus Euro Amid Lower Treasury Yields
Dollar and Euro Movements
The U.S. dollar slipped to a one-month low against the euro on Wednesday, pressured by declining Treasury yields. Traders are bracing for a critical U.S. inflation report later in the day that could influence Federal Reserve policy directions. The euro rose 0.03% to $1.0823 during Asian trading hours, peaking at $1.0828, a level not seen since April 10.
Treasury Yields and Dollar Index
The U.S. dollar index, which compares the dollar to six major currencies and is heavily weighted towards the euro, dropped 0.11% to 104.94, having earlier reached a 1.5-week low of 104.92. The benchmark long-term U.S. Treasury yield fell to 4.4414%, continuing a 3.5-basis point decline from the previous night.
Upcoming U.S. Inflation Report
Market focus is on the upcoming report on core consumer prices, expected to show a 0.3% month-on-month rise in April, down from 0.4% in March, according to a Reuters poll. Alan Ruskin, a strategist at Deutsche Bank, noted the unusual consensus among analysts at 0.3%, indicating that any significant deviation could have a substantial market impact.
Potential Market Reactions
Ruskin highlighted that a larger-than-expected increase in CPI (0.5% or more) could significantly alter rate path expectations and trigger a major surge in the dollar against all currencies. Conversely, smaller deviations might not sway the markets as much.
Fed Chair's Bullish Outlook
Fed Chair Jerome Powell provided an optimistic view of the U.S. economy on Tuesday, predicting continued growth and a decline in inflation. Despite higher-than-expected inflation in Q1, which led to a reevaluation of Fed rate cut expectations, bets on rate reductions this year are now down to about 45 basis points.
Yen Remains Weak Amid Yield Gap
Despite the dollar's general weakness, it continued to climb against the yen, hovering close to a two-week low. The dollar edged back 0.12% to 156.245 yen but had peaked at 156.80 overnight. Japanese long-term yields remain low at 0.955%, despite a more hawkish tone from the Bank of Japan (BOJ) and increased prospects for another rate hike in June.
BOJ's Intervention and CPI Impact
The dollar's peak against the yen on April 29 prompted aggressive yen buying, suspected to involve the BOJ and Japanese finance ministry. Tony Sycamore, an analyst at IG, noted that the BOJ would prefer a CPI release that aligns with expectations to avoid further intervention discussions.
Yuan and Antipodean Currencies Gain
The yuan rebounded from a two-week low against the dollar, buoyed by reports of a possible plan to address China's housing glut, which offset concerns over increased U.S. tariffs on Chinese goods. The dollar dropped 0.24% to 7.2232 yuan in offshore trading, after reaching 7.2460 overnight.
Antipodean currencies also benefited from the positive sentiment towards China. The Australian dollar gained 0.32% to $0.6648, and the New Zealand dollar climbed 0.37% to $0.6062, both reaching their highest levels in weeks.
