By Peter Nurse
Investing.com - The U.S. dollar edged lower in early European trade Wednesday, handing back some of the previous session’s gains as traders cautiously await the release of the minutes of the Federal Reserve’s February meeting.
At 02:55 ET (07:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 104.025, still near its recent six-week high after gaining 0.3% on Tuesday.
The dollar bounced on Tuesday after data showed that U.S. business activity unexpectedly rebounded in February to reach its highest level in eight months, adding to recent numbers showing that U.S. retail sales remained robust, a tight labor market, while inflation stayed elevated.
U.S. Treasury yields powered ahead as the strength of the world’s largest economy provided the Fed with more headroom to hike interest rates.
Markets have thus raised their expectations of how high the Federal Reserve would need to lift rates to tame inflation, and will now focus on the minutes from the Fed's latest meeting, due for release later this session, for more clues of the policymakers' thinking.
“The key event on the Fed front this week, the FOMC minutes, may not match the hawkish tone we heard after the strong jobs and inflation data released after the meeting,” said analysts at ING, in a note.
Elsewhere, EUR/USD rose 0.1% to 1.0657, after data released earlier Wednesday showed that inflation remained at a high level in Germany, the euro zone’s most important economy.
German consumer prices, harmonized to compare with other European Union countries, rose by 9.2% on the year in January, with prices increasing 0.5% on the month.
This heaps the pressure on the European Central Bank to continue raising interest rates in an attempt to tame inflation.
Goldman Sachs said, in a note earlier this week, it expected the ECB to raise interest rates thrice this year – in March, May, and June – taking the terminal rate to 3.5%, up from its previous 3.25% estimate.
GBP/USD edged higher to 1.2120, with the pound holding on Tuesday’s gains after the U.K. flash composite PMI surged to 53.0 this month, above the 50 threshold for growth for the first time since July.
USD/JPY fell 0.2% to 134.69, with the yen attempting to make inroads into its recent losses ahead of a widely-anticipated address by Bank of Japan Governor nominee Kazuo Ueda, which could provide more direction of the central bank’s future plans.
NZD/USD rose 0.4% to 0.6238 after the Reserve Bank of New Zealand earlier Wednesday hiked interest rates by 50 basis points to 4.75%, its highest level since late 2008, and forecast more increases as inflation remained elevated.