Draghi's U-turn sends euro to two-week low

London

THE dollar traded near two-week highs against the euro on Wednesday as investors waited to see whether the US Federal Reserve would sound as dovish on future interest rate cuts and stimulus as the European Central Bank.

ECB president Mario Draghi's about-face on easing on Tuesday fuelled talk of a worldwide wave of central bank stimulus, firing up stocks, bonds and commodities and weakening the euro, although currency moves were relatively small.

The Fed is scheduled to release its monetary policy statement at 1800 GMT, followed by a press conference by chairman Jerome Powell. Futures markets have almost fully priced in a quarter-point easing in July and imply more than 60 basis points of cuts by Christmas.

The euro gained 0.1 per cent to US$1.1203, having fallen to a two-week low of US$1.1181 on Tuesday after Mr Draghi spoke and German government bond yields dropped to new record lows.

The dollar, measured against other currencies, fell 0.1 per cent to 97.561 from Tuesday's two-week high.

The dollar had been under pressure in late May as global trade tensions and economic weakness led investors to bet on Fed rate cuts. Expectations that other central banks will follow suit have since helped the dollar recover.

"Relative to what the market is priced for, it's hard to see how they (the Fed) will surprise the market on the dovish side. The risks are the other way," said Adam Cole, a currencies strategist at RBC Capital Markets.

Mr Cole said he believed the market was "underplaying" the spread between Europe and the United States, and even if the Fed cuts, investors will still be paying to hold euros while earning a relatively good yield with dollars.

That should support the US currency. Mr Cole predicted a low for the euro of US$1.10 this year.

US President Donald Trump said on Tuesday he would have an extended meeting with Chinese President Xi Jinping at the Group of 20 summit later this month, raising hopes that they can ease tensions in a trade dispute that has damaged the world economy.

UBS wealth management said that the dollar could rise against the yen if the Fed was less dovish than expected or the G-20 summit ends with a temporary US-China trade war truce. "A bounce towards 110 would make adding short dollar-yen positions attractive," UBS said. "We expect dollar-yen to grind lower as US growth slows and as US-China trade tensions persist." The yen stood little changed at 108.41 yen per dollar .

China's yuan pulled back from Tuesday's three-week high following reports that Mr Xi and Mr Trump would meet. The offshore yuan last traded at 6.9070, down 0.1 per cent on the day.

Sterling rose to US$1.2575 after May inflation rose in line with expectations, although concern that eurosceptic Boris Johnson would become Britain's next prime minister is likely to cap any rally. REUTERS