On Tuesday, the dollar exhibited a slight weakening as a modest increase in risk appetite was observed across markets. However, its movements remained constrained against other major currencies as investors awaited key inflation data releases from major economies later in the week, which could offer valuable insights into the global interest rate outlook.
Despite some dovish comments from European Central Bank (ECB) policymakers on Monday and reports indicating stagnant German business morale in May, the euro managed to advance by 0.16% to $1.0877. Attention turned to forthcoming German inflation data expected on Wednesday, along with the broader eurozone bloc’s inflation reading scheduled for Friday. These figures are highly anticipated as they are likely to confirm expectations of an ECB rate cut in the upcoming week, and investors will closely analyze them for clues on potential future easing measures by the central bank.
Sterling and the New Zealand dollar both reached over two-month highs, trading at $1.2778 and $0.6161, respectively, signaling increased investor confidence in these currencies. Meanwhile, the Australian dollar edged up by 0.2% to $0.6668, with Australia’s monthly consumer price index data also on the agenda for Wednesday.
However, the most significant event awaited by market participants was the release of the U.S. core personal consumption expenditures (PCE) price index report on Friday. As the Federal Reserve’s preferred measure of inflation, this data point was expected to remain steady on a monthly basis. Given the pivotal role of U.S. interest rate expectations in driving currency movements, any surprises in the inflation data could trigger significant reactions, particularly in U.S. Treasury yields and the value of the dollar.
The dollar index, which gauges the greenback against a basket of major currencies, dipped by 0.12% to 104.43. Meanwhile, the yen hovered near 157 per dollar and last stood at 156.67 per dollar. The Bank of Japan (BOJ) disclosed that all three key measures of underlying inflation fell below 2% in April for the first time since August 2022, introducing uncertainty regarding the timing of its next interest rate hike. BOJ Governor Kazuo Ueda emphasized the cautious approach the central bank would take regarding inflation-targeting frameworks.
In the cryptocurrency market, bitcoin experienced a decline of 2.5% to $67,780, while ether saw a more modest drop of over 1% to $3,845.50.
Overall, market participants remained vigilant for economic data releases and central bank communications, which could significantly influence currency movements in the near term.