Investing.com – The U.S. dollar steadied in European deals on Thursday after falling to a multi-week low overnight after a softer U.S. inflation report brought renewed attention to Fed rate cuts.
At 04:25 ET (0825 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was trading 0.1% higher at 104.285, having fallen to a five-week low just below 104 overnight.
Dollar weakens after key inflation data
The dollar remains in trouble after the latest US inflation data raised expectations that there will be two interest rate cuts this year, likely starting in September.
The index rose 0.3% in April on Wednesday, slower than expected for a 0.4% gain, a relief to markets after robust consumer prices in the first quarter led to sharp cuts in rate cuts and even raised some concerns regarding an additional increase.
The data also sent U.S. Treasury yields falling to a six-week low as traders reassessed the likely path of Fed monetary policy.
“Markets have given more weight to the encouraging news following two days of inflation data that saw the dollar almost erase gains made since the consumer price index disappointment in mid-April,” ING analysts said in a note.
Several Fed speakers are expected to weigh in later in the session, but it’s likely that investors will need concrete evidence if expectations for rate cuts change radically.
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“At this stage, our preference is not for the dollar to continue falling until the end of May, but for a period of calm trading with little sense of direction and low volatility. This is mainly because the Fed needs accurate data for a significant change in prices, and the next key release – the main PCE – will not come out until May 31,” ING added.
Euro retreats from previous highs
In Europe, trade was 0.1% lower at 1.0867, with the euro slightly lower on Thursday after rising to its highest level since March 21.
The Bank is expected to begin cutting interest rates from record highs in June, and markets now see up to three rate cuts this year or two after June, most likely in September and December.
“The 1.0900 level should not be very strong resistance if data from the US – such as today’s jobless claims – adds pressure on the dollar. However, a move to 1.1000 levels appears premature given the still bleak inflation picture in the US,” ING said.
fell 0.1% to 1.2675, with sterling giving back some of its gains from the previous session when it rose above 1.27 for the first time since April 10.
Rates are also expected to fall this summer from a 16-year high, but recent stronger-than-expected GDP growth could delay that until the ECB takes action.
Yen edges up slightly after weak GDP data
In Asia, the rate fell 0.2% to 154.64, with the yen benefiting from dollar weakness, but the pair remained well above levels reached earlier in May when government intervention in currency markets was seen.
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The yen’s recovery stalled as data showed the Japanese economy contracted much more than expected in the first quarter, raising doubts about how much headroom the Bank of Japan has to raise interest rates further.
The stock traded little changed at 7.2187 as sentiment towards China remained weak after Washington imposed stricter trade tariffs on key Chinese sectors such as electric vehicles, medicines and solar technology.