Investing.com – The U.S. dollar slipped in early European trade on Wednesday, retreating from recent highs as traders considered coordinated official intervention, but the underlying tone remained positive.
At 05:20 ET (0920 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was trading 0.1% lower at 105.640, retreating from a five-month peak of 106.51 seen earlier in week. .
Dollar falls on fears of intervention
The dollar has been in demand lately as strong U.S. economic data and persistent inflation have prompted investors to radically rethink the chances of a rate cut by the Federal Reserve anytime soon.
Heightened geopolitical tensions in the Middle East have also increased the dollar’s appeal as a safe-haven currency, pushing the dollar to its highest level since November.
However, the dollar’s sharp rise led to sharp losses in other currencies, especially in Asia.
That led to the US, Japan and South Korea announcing they had agreed to “consult closely” on currency markets during their first trilateral financial dialogue on Wednesday – with officials raising the possibility of coordinated intervention.
“It might be over-reading this US call for Asian currency intervention, but this new coordination between Japan and Korea does raise the possibility that both countries could intervene at the same time,” ING analysts said in a note. .
However, fundamental indicators still point to further strengthening of the dollar.
“Any large-scale currency intervention could temporarily slow dollar gains, although a reversal would require a significant change in current conditions,” ING added.
The ECB is “crystal clear” about the possibility of a rate cut in June
In Europe, the index rose 0.1% to 1.0677, adding to Wednesday’s 0.5% gain and off a five-month low seen earlier this month.
However, these gains may only be temporary as the European Central Bank is now expected to cut interest rates ahead of the Federal Reserve in an attempt to boost the region’s struggling economies.
The ECB has made it “crystal clear” that interest rates could be cut in June, ECB Vice-President Luis de Guindos said earlier on Thursday, but he also firmly said further policy decisions remained in doubt.
Markets now expect the central bank’s 4% deposit rate to be cut by 75 basis points this year, or two full steps after June.
rose 0.2% to 1.2475, trading just above a five-month low after the data was released on Wednesday. In March, UK growth was the weakest in two and a half years.
Earlier this week, the Governor of the Bank of England said the UK faces less inflation risk than the US and “this raises the question of why the market is pricing in the same amount of easing this year – 45 bps.” – for both the Fed and the Bank of England.” This was reported by ING analysts.
“We could see these expectations changing in the coming months as further policy easing by the Bank of England is expected. This will be negative for the pound.”
The yen and yuan remained virtually unchanged
In Asia, shares were largely unchanged at 154.38 after testing 34-year highs well above 154. The yen’s weakness also meant markets remained wary of government intervention.
Japanese consumer inflation data due on Friday is expected to provide further guidance on the yen’s likely path.
rose to 7.2389, also making some progress after rising to five-month highs in recent weeks. Uncertainty over the Chinese economy kept traders biased toward the yuan as the People’s Bank took steps to stem further losses in the currency.