Dollar Holds Steady as Investors Eye Central Bank Policy Paths

The dollar pared back from earlier gains to trade near the flatline on Tuesday, with investors mulling the outlook for central bank policy actions in response to soaring inflation.

The US Dollar Index – which measures the greenback against a basket of six other currencies – was little changed at 103.95 by 05:50 EST (0950 GMT).

Weighing on sentiment in Europe were signs of weakness in recent economic data. The latest GfK German consumer climate index fell to -27.4 in July from a revised -26.2 the previous month as shoppers in the Eurozone’s largest economy struggled with hefty price rises. French consumer confidence for the same period also came in below expectations.

Investors are trying to gauge whether these signals – along with similar readings from other key economies – could moderate expectations for aggressive central bank policy tightening. Concerns that large interest rate increases may trigger a broader economic slowdown have led some investors to seek the relative safety of the dollar, helping give recent strength to the greenback.

This week, focus is also on an annual European Central Bank forum in Sintra, Portugal. Speaking at the event today, ECB President Christine Lagarde reiterated the central bank’s intention to raise interest rates in July and September, adding that it will go “as far as necessary” to curb price rises. However, she stressed that this plan will remain flexible.

EUR/USD was trading slightly higher in the wake of Lagarde’s statement, up 0.07% to 1.0589.

Elsewhere in Europe, the GBP/USD fell slightly by 0.07% to 1.2256.

In China, the USD/CNY pair was down by 0.05% at 6.6886. Earlier in the day, the Governor of the People’s Bank of China Yi Gang said the central bank will keep its policy accommodative to support the economy, while officials in Beijing also announced the easing of some COVID restrictions for overseas travelers.