The dollar clung to small overnight gains on Wednesday, edging back from near a five-month trough versus major peers, as a pick up in U.S. manufacturing kept bets alive for a quicker normalisation of Federal Reserve policy.
The dollar index, which measures the greenback against six rivals, hovered just below 90 after dipping to as low as 89.662 on Tuesday and approaching the lowest since Jan. 7 at 89.533.
Likewise, the euro traded at $1.2219 after pulling back from near a multi-month top overnight, when it climbed to $1.22545.
Investors were also eyeing the trajectory of China’s recently bullish yuan. It was little changed at 6.3823 per dollar in offshore trading, after retreating from the three-year high of 6.3526 on Monday as policymakers took steps to cool its advance including raising banks’ FX reserve requirements.
Sterling remained lower at $1.41515 after easing off a three-year high of $1.4250 reached on Tuesday, while the Canadian dollar was at C$1.20675 per greenback after rallying to a fresh six-year peak of C$1.2007 overnight as oil prices rose.
“The direction of the dollar is definitely the focus,” said Shinichiro Kadota, senior currency strategist at Barclays in Tokyo.
The market is split in its view on whether current inflationary pressures will be transitory, as the Fed maintains, or will persist long enough to force policymakers to taper stimulus and raise rates earlier than they have so far signalled, Kadota said.
“Even if inflation continues to overshoot, I think the Fed will continue to say it’s temporary, but the market won’t know for sure until fall, so we’re kind of stuck in this uncertainty.”
Over the near term, the euro and yuan will be key in determining if the dollar remains on the back foot or stages a rebound, he said.
On Tuesday, the Institute for Supply Management (ISM) said its index of U.S. manufacturing activity rose in May as pent-up demand amid a reopening economy boosted orders.
The dollar initially traded lower on the report, in which ISM said manufacturing’s growth potential continued to be hampered by worker absenteeism and temporary shutdowns because of shortages of parts and labour.
Those employment shortcomings will be front and centre of investors’ minds on Friday with the release of nonfarm payrolls numbers for May, after April’s much-weaker-than-expected reading sent the dollar index slumping 0.7% on May 7.
The index was mostly flat from Tuesday at 89.919, but still well off Friday’s high of 90.447, when a measure of U.S. inflation closely watched by the Fed posted its biggest annual rise since 1992.
“I don’t think inflation will last long-term,” particularly with pressure from higher energy prices starting to dissipate, said Minori Uchida, chief currency analyst at MUFG Bank, who predicts no rate hikes until after 2024.
“I think the dollar will ease toward the end of this year.”
– Reuters