US dollar slips from near three-month highs as traders gauge rate outlook

THE US dollar fell slightly on Thursday (Jun 8) from near three-month highs, a day after a surprise rate hike from the Bank of Canada suggested the US Federal Reserve may also have more work to do to combat inflation.

The euro was last up 0.3 per cent at US$1.073 against the US dollar – the most traded currency pair in global markets. That was despite data showing that the eurozone economy slipped into a mild recession in the first quarter, after gross domestic product statistics were revised.

The US dollar index, which measures the currency against six major peers, was down 0.19 per cent to 103.84. Last week, the index hit 104.7, the highest since Mar 15.

A view among investors that the US two-year bond yield had potentially peaked was weighing on the greenback, said Simon Harvey, head of FX analysis at Monex Europe.

But, he added: “We must highlight that the moves we’re seeing today are marginal.”

Yields on the US two-year Treasury rose after the Bank of Canada decision and hit 4.592 per cent on Thursday before slipping back to 4.565 per cent. Bond yields are key drivers of currencies, with higher rates typically attracting investment.

The Bank of Canada surprised traders by raising interest rates to 4.75 per cent, a 22-year high. It followed a rate hike by the Reserve Bank of Australia on Tuesday.

“The view here was that if both Australia and Canada felt the need for further hikes, in all probability the Fed would too,” Chris Turner, head of markets at ING, said in a note to clients.

Against Canada’s dollar, the US dollar was down 0.19 per cent at C$1.335, after falling 0.24 per cent on Wednesday.

The Australian dollar was up 0.43 per cent at US$0.668, taking its monthly gains to roughly 2.7 per cent. Sterling was 0.21 per cent higher at US$1.247.

The Canadian decision put the spotlight back on the Fed, which sets interest rates on Wednesday next week.

According to derivative market pricing, traders currently think there’s a 70 per cent chance the Fed will hold rates steady next week, and a 30 per cent chance of an increase by 25 basis points (bps).

They think the Fed could then raise rates by 25 bps in July, after policymakers hinted at a so-called skip. That would boost the Fed funds rate to a range of 5.25 per cent to 5 per cent.

The European Central Bank sets rates on Thursday and traders broadly expect a 25 bp hike, to be followed by another 25-bp increase in July, taking rates to 3.75 per cent.

In Asia, the US dollar was down 0.29 per cent against Japan’s yen at 139.71 yen per US dollar, after rising 0.37 per cent the previous day.

The onshore and offshore yuan eased to their weakest in six months against the US dollar, further pressured by economic worries.

Data released on Wednesday showed China’s exports shrank much faster than expected in May, while imports extended declines, raising doubts about the country’s fragile economic recovery.

Meanwhile, the Turkish lira slipped to a record low of 23.39 per US dollar in early Asia trading. It remained under pressure, last at 23.36.