On Wednesday, the dollar found itself grappling with persistent weakness against both the euro and sterling, a consequence of robust European activity data contrasting with cooling business growth in the United States.
Meanwhile, the yen continued to linger near a 34-year low against the dollar, prompting heightened intervention warnings from Japanese officials.
The dollar index, a gauge measuring the currency against a basket of major counterparts like the euro, sterling, and yen, remained relatively unchanged at 105.64 in early Asian trading. This came after experiencing a 0.4% decline overnight, with the index touching its lowest level since April 12 at 105.23.
The euro held steady at $1.069975 after posting a 0.45% gain on Tuesday. This uptick followed data revealing that business activity in the eurozone had expanded at its fastest pace in nearly a year, primarily fueled by a rebound in services.
Similarly, sterling received a boost from strong overnight data indicating accelerated growth in British business activity. Bank of England Chief Economist Huw Pill’s comments suggesting that interest rate cuts were not imminent also contributed to sterling’s stability at $1.24485, marking a 0.79% increase from the previous session.
In contrast, U.S. business activity slowed in April to a four-month low due to weakened demand, accompanied by a slight easing of inflation rates. These developments could potentially offer some relief for the Federal Reserve.
The release of the preferred consumer inflation measure, the PCE deflator, on Friday is anticipated to provide further insight into the Fed’s stance. Market expectations, as indicated by the CME’s FedWatch tool, currently suggest a 73% likelihood of a rate cut by September.
Elsewhere, the Australian dollar maintained its position near its highest level since April 15 at $0.64875 ahead of consumer inflation data. Following a rebound of more than 1% over the past two days from a five-month low reached on Friday, the Australian dollar exhibited signs of resilience.
Despite the dollar’s broader challenges, it managed to briefly ascend to a fresh 34-year high against the yen at 154.88. Nonetheless, traders exercised caution, with the currency pair oscillating within a narrow range amid apprehensions regarding potential intervention by Japanese authorities should the dollar surpass 155.
Japanese Finance Minister Shunichi Suzuki issued a stern warning on Tuesday regarding the prospect of intervention, following discussions with U.S. and South Korean counterparts aimed at addressing excessive movements in the yen.
While the Bank of Japan is expected to maintain unchanged policy settings at its upcoming meeting, its cautious approach has constrained any significant appreciation of the yen. FX intervention by Japanese authorities may face hurdles, particularly if underlying fundamentals do not support a reversal in the USD/JPY trend.
Looking ahead, the fate of the dollar against the yen may hinge on the timing of potential rate cuts by the Fed, with expectations suggesting a possible shift in September.
Despite the potential costs and complexities associated with intervention, Japanese authorities may intervene to stabilize the yen if its weakness persists. However, the success of such measures may hinge on broader market dynamics aligning with their efforts.