Dollar Edges Lower; Risk Sentiment Remains Fragile

The U.S. dollar edged lower in early European trade Thursday, handing back some of the previous session’s substantial gains although the safe haven remains in demand with risk sentiment fragile.

At 3:05 AM ET (0705 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 103.770, following a 0.6% jump during the previous session.

EUR/USD climbed 0.2% to 1.0487, after Wednesday’s 0.8% slump, GBP/USD rose 0.2% to 1.2367, after dropping 1.2% overnight, following a surge in U.K. inflation, fostered worries for a sharp economic slowdown, while AUD/USD rose 0.6% to 0.6992, after the pair had retreated 1.1% overnight.

By contrast, USD/JPY rose 0.3% to 128.57, with the safe-haven yen sliding during Thursday’s session.

Despite these safe-haven assets cooling after a recent rally, sentiment remains fragile on mounting concerns that aggressive tightening by the Federal Reserve and other global central banks could choke growth.

Fed Chair Jerome Powell had said earlier in the week that the U.S. central bank would push interest rates as high as needed to stem a surge in inflation, and weak U.S. housing data on Wednesday added to slowdown concerns.

The “comments by Fed Chair Powell were quite relevant from a signaling perspective, as he firmly reiterated the Fed’s determination to bring inflation sustainably lower, even by hiking beyond the neutral rate if necessary,” said analysts at ING, in a note. “The notion of aggressive Fed tightening continues to argue against a sustained bearish dollar trend.”

Attention, Thursday will turn towards the release of the minutes from the last European Central Bank meeting, due for release later in the session, with investors looking for clues for a potential timetable for monetary policy tightening.

Dutch central banker Klaas Knot, on Tuesday, raised the possibility of a 50 basis points hike in July, the first time that any ECB policymaker has mentioned that, and Bank of Finland Governor Olli Rehn said on Wednesday that the ECB should get its key rate above zero “relatively quickly.”

“We also believe that markets are pricing in too much tightening by the ECB – though not by the Fed – and expect the theme of growth divergence (exacerbated by the EU-Russia standoff on commodities) to become more relevant into the summer,” ING added.