May 30 2024: The U.S. dollar stabilized in early European trading on Thursday, hovering near two-week highs, bolstered by rising yields and growing confidence that the Federal Reserve will not cut interest rates soon.
At 04:35 ET (08:35 GMT), the Dollar Index, which measures the greenback against a basket of six other currencies, edged slightly lower to 104.940, after reaching its highest point since May 14 at 105.17 earlier in the session, following a 0.5% increase the previous day.
Safe Haven Dollar in Demand
A series of stronger-than-expected economic reports, hawkish statements from several Fed officials, and a series of poorly received bond auctions have led to a sharp rise in bond yields, driving investors to seek the safety of the dollar.
Confidence is increasing that the Fed will maintain high interest rates for an extended period, with traders awaiting confirmation from Friday’s PCE price index data, the Fed’s preferred inflation gauge, to see if inflation remained persistent in April.
Before that, a revised reading of the first-quarter gross domestic product is expected later on Thursday, anticipated to show continued resilience in the U.S. economy. Economic strength provides the Fed with more leeway to keep rates high for longer.
“A series of softer U.S. Treasury auctions and a sell-off in the longer end of the bond market is weighing on risk assets and providing some support to the dollar,” noted analysts at ING.
“This may well just be a short-term swing ahead of Friday’s key U.S. data release, but it is a trend worth watching.”
Euro Bounces Off Two-Week Low
In Europe, EUR/USD traded 0.1% higher at 1.0810, recovering from a two-week low ahead of the release of eurozone business confidence data later in the session, followed by the eurozone CPI release at the end of the week.
“Some modest improvement is expected across the board, but as we saw with Monday’s German IFO release, the pick-up in sentiment looks likely to be more modest than euphoric,” analysts at ING commented.
The European Central Bank is widely expected to announce an interest rate cut next week, but uncertainty about subsequent actions could be influenced by Friday’s inflation data.
GBP/USD fell 0.1% to 1.2697, after the British pound dropped to a two-month low in the previous session.
Yen Gains Ahead of Tokyo Inflation Report
In Asia, USD/JPY traded 0.4% lower at 157.03, though the pair remained close to recent highs amid continued yen weakness.
The focus is now on an upcoming inflation report from Tokyo, due on Friday, for more insights into the Japanese economy. Any signs of increasing inflation could provide some relief for the yen.
USD/CNY traded 0.1% lower at 7.2461, under pressure from concerns over a sluggish Chinese economy.
Purchasing managers index data from China is also due on Friday.