Dollar Edges Lower; Yen Pressured by Rising Yields

The U.S. dollar edged lower overall in early European trade Wednesday, handing back some overnight gains on rising Treasury yields with traders looking to the minutes from the last Federal Reserve meeting for clues on the timing of its expected tightening.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 96.210, remaining close to its one-week high reached Tuesday.

“A break of 95.50 or 96.50 will signal the index’s next directional move, although if U.S. yields stay firm, the greenback looks set to continue to outperform in the major currency space,” said Jeffrey Halley, an analyst at OANDA.

U.S. yields eased back slightly Wednesday after sharp gains to pre pandemic levels on Tuesday as investors geared up for early interest rate hikes from the Federal Reserve to curb high inflation.

USD/JPY rose 0.2% to 115.94, after climbing to a five-year high of 116.35 on Tuesday, with the Bank of Japan seen as being one of the last of the major central banks to sanction policy tightening.

EUR/USD fell 0.1% to 1.1300, just above a two-week low, GBP/USD edged higher to 1.3535, while the risk-sensitive AUD/USD edged lower to 0.7236.

The U.S. Federal Reserve will release the minutes from its December meeting later in the day, and will be studied for clues to the central bank’s timetable for rate hikes.

Fed Funds futures suggest interest rates will start rising by May, but expectations are growing that the central bank could move sooner than that, given the strength of the U.S. economic recovery.

The Fed is on track to end its asset-buying program in March, potentially opening the way for raising rates, after it on Dec. 15 doubled the pace of tapering purchases.

Also due for release Wednesday will be the ADP employment data, a closely watched precursor to Friday’s nonfarm payrolls.

USD/PLN edged lower to 4.0398 after Poland’s central bank lifted its benchmark interest rate by 50 basis points on Tuesday, matching December’s hike, as it sought to combat soaring inflation.

“We expect that in the face of a prolonged period of elevated inflation, MPC chair Adam Glapiński will suggest the Council remains open to further monetary tightening this year, which should support the zloty,” said Rafal Benecki, an analyst at ING.

Dollar Edges Lower; Yen Pressured by Rising Yields