By Peter Nurse
Investing.com – The U.S. dollar edged lower in early European trade Tuesday, but remained near a 20-year high as traders prepared for the latest Federal Reserve meeting in the wake of a red-hot U.S. inflation report.
At 3 AM ET (0700 GMT), the , which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 104.890, having climbed to a two-decade peak of 105.29 on Monday.
“Some rebound in risk assets over the coming days is possible given how fast risk assets have dropped in the past few sessions, and the dollar might face a correction soon, but at the same time, we think the FOMC rate announcement on Wednesday will prove mostly supportive for the greenback,” said analysts at ING, in a note.
The dollar’s recent gains follow the release of Friday’s May , which soared to a new four-decade high of 8.6% on the year and caused traders to price in more aggressive rate hikes as the Federal Reserve struggles to cope with the unexpectedly hot inflation reading.
“The market’s reaction will be primarily driven by any clues about a potential deceleration in tightening in September, both through the updated dot plot projections and in Chair Jerome Powell’s press conference,” ING added.
The prospect of more hikes by the Federal Reserve in the near future has resulted in the Treasury yield climbing strongly, to currently stand at 3.3091%. The yield is below that, at 3.3050%, an inversion that is usually seen as a sign of an upcoming recession.
rose 0.1% 134.59, after hitting a 24-year low of 135.22 on Monday. The expanded a round of bond purchases earlier Tuesday to keep the government bond yield near its 0.25% cap to try and boost a struggling economy.
The yen is the worst-performing major currency this year, down around 14%, as the BoJ keeps rates low while U.S. yields surge on bets for continued Federal Reserve hikes.
rose 0.4% to 1.0448, with the euro receiving a boost after in May rose 0.9% on a monthly basis, as inflationary pressure deepens on Europe’s largest economy.
The also jumped to 7.9% in May, up from 7.4% in the previous month, suggesting that the will face a challenge in its bid to control soaring inflation.
rose 0.4% to 1.2178, just above a two-year low despite the being expected to deliver a 25 bp hike on Thursday.
The U.K. rose in May as the number of people claiming fell by less than expected, despite continued gains in overall employment levels. This, coupled with Monday’s fall in April , suggests the BoE will struggle to tame soaring inflation without pushing the country’s economy into recession.
The risk-sensitive rose 0.6% to 0.6963, rose 0.5% to 0.6286, while fell 0.6% to 6.7176.
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