Investing.com – The U.S. dollar rose in early European trade on Wednesday, bouncing off two-month lows ahead of more signs of future monetary policy.
At 03:40 ET (0840 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, rose 0.2% to 104.265 after falling below 104 for the first time since early April earlier this week.
The dollar’s strengthening is likely to continue
The dollar has gained more than 3% this year, with much of that strength coming from economic strength and persistent inflation keeping interest rates elevated longer than previously expected.
At the start of the year, traders predicted the US Federal Reserve would already cut rates at least once, and the latest interest rate futures now suggest the Fed will begin easing policy in September.
The expected monthly US report is due on Friday, but inflation is likely to be a more important variable in the Fed’s policy decision.
Fed preferred bonds released last week showed inflation at 2.7%, well above the Fed’s 2.0% target, suggesting the dollar could remain strong for an extended period.
“We believe US inflation could rise again by mid-year and the Fed’s easing cycle could be very short, almost regardless of when it starts,” said Jane Foley, head of currency strategy at Rabobank.
“This means that even though the dollar will fall a little when the Fed starts cutting rates, the dollar will likely remain relatively resilient. It will not lose much of this year’s gains and will remain overvalued.”
Euro weak despite Eurozone PMI data
In Europe, shares traded 0.1% lower at 1.0873, even after data in May showed business activity in the euro zone grew at its fastest pace in a year.
In May, the HCOB rate rose to 52.2 from April’s 51.7, the highest since May 2023.
Although it was slightly below the preliminary estimate of 52.3, it remained above the 50 mark that separates expansion from contraction for the third month in a row.
The meeting will take place on Thursday, and markets estimate the probability of a decline at 95%.
rose 0.1% to 1.2776 after the UK index hit 53.0 in May, a slight fall from the previous month’s 54.1 but still above the critical 50 mark.
With a potentially crucial policy meeting later this month, traders are awaiting clues about when the rate-cut cycle will begin.
Yen remains weak ahead of Bank of Japan meeting
In Asia, trading rose 0.8% to 156.10, with the yen falling, although average Japanese cash income rose 2.1% in April, as did total wage and salary income, both showing wage increases achieved by major Japanese unions earlier this year.
The bank is expected to scale back some of its asset purchase policies at a meeting next week.
traded 0.1% higher at 7.2466, even though data showed the country’s services sector grew more than expected.