The dollar was last down 0.2% at 106.12, just short of the five-month high of 106.51 hit on Tuesday
The dollar inched lower but was near 5-1/2-month highs on Wednesday as Fed officials reiterated the rate-cutting cycle was on hold pending new economic data, while the pricing of the monetary easing outlook for G10 central banks was roughly unchanged.
Top U.S. central bank officials including Fed Chair Jerome Powell backed away on Tuesday from providing any guidance on when interest rates may be reduced, saying instead that monetary policy needed to be restrictive for longer.
Recent data indicated that the U.S. economy was on a different track compared with the Fed’s forecasts, leading investors to pare their bets on future rate cuts. In the meantime, risks of a broadening Middle East conflict added to the dollar’s short-term appeal as a safe-haven asset.
Some analysts said they were still bullish on the greenback at the current levels.
On any escalation of the Middle East crisis, we would expect the U.S. dollar to benefit from safe-haven flows, according to Jane Foley, senior forex strategist at Rabobank, confirming the target for the euro/dollar at 1.05.
Bank of America revised last week its call for Fed monetary easing to begin in December this year or later, instead of June, and contended the dollar would strengthen even more if markets price out the Fed cuts for this year.
However, “with hedge funds’ net U.S. dollar longs at their highest post-COVID level, a stronger U.S. dollar from here would likely rely more on real money clients”, according to Michalis Rousakis, forex strategist at BoA.
Against a basket of currencies, the dollar was last down 0.2% at 106.12, just short of the five-month high of 106.51 hit on Tuesday. The index is up 4.8% for the year.
The dollar was lower against the euro at $1.0643 on Wednesday, not far from the 5-1/2-month high of $1.06013 it hit on Tuesday.
As the market is still discounting around two Fed cuts this year, the risk is for a hawkish repricing of the Fed policy path in the coming weeks, said Olivier Korber, strategist at SG Markets. This could pressure EUR/USD below 1.05.
Traders now anticipate 40 bps of cuts in 2024, drastically lower than the 160 bps of easing they priced for at the beginning of the year.
