Dollar Slips From Near 3-month Highs as Traders Gauge Rate Outlook

Dollar Slips From Near 3-month Highs as Traders Gauge Rate Outlook
A U.S. hundred dollar bill and Japanese 10,000 yen notes are seen in this photo illustration in Tokyo, Japan, on Feb. 28, 2013. (Shohei Miyano/Reuters)

LONDON/SINGAPORE—The dollar fell slightly on Thursday from near three-month highs, a day after a surprise rate hike from the Bank of Canada suggested the Federal Reserve may also have more work to do to combat inflation.

The euro was last up 0.3 percent at $1.073 against the dollar—the most traded currency pair in global markets.

That was despite data showing that the eurozone economy slipped into a mild recession in the first quarter, after gross domestic product statistics were revised.

The dollar index, which measures the currency against six major peers, was down 0.19 percent to 103.84. Last week the index hit 104.7, the highest since March 15.

A view among investors that the U.S. 2-year bond yield had potentially peaked was weighing on the dollar, said Simon Harvey, head of FX analysis at Monex Europe.

But, he added: “We must highlight that the moves we’re seeing today are marginal.”

Yields on the U.S. 2-year Treasury rose after the Bank of Canada decision and hit 4.592 percent on Thursday before slipping back to 4.565 percent. Bond yields are key drivers of currencies, with higher rates typically attracting investment.

The Bank of Canada surprised traders by raising interest rates to 4.75 percent, a 22-year high. It followed a rate hike by the Reserve Bank of Australia on Tuesday.

“The view here was that if both Australia and Canada felt the need for further hikes, in all probability the Fed would too,” Chris Turner, head of markets at ING, said in a note to clients.

Against Canada’s dollar, the U.S. dollar was down 0.19 percent at C$1.335, after falling 0.24 percent on Wednesday.

The Australian dollar was up 0.43 percent at $0.668, taking its monthly gains to roughly 2.7 percent. Sterling was 0.21 percent higher at $1.247.

The Canadian decision put the spotlight back on the Federal Reserve, which sets interest rates on Wednesday next week.

According to derivative market pricing, traders currently think there’s a 70 percent chance the Fed will hold rates steady next week, and a 30 percent chance of a 25 basis point (bp) increase.

They think the Fed could then raise rates by 25 bps in July, after policymakers hinted at a so-called skip. That would boost the Fed funds rate to a range of 5.25 percent to 5 percent.

The European Central Bank sets rates on Thursday and traders broadly expect a 25 bp hike, to be followed by another 25 bp increase in July, taking rates to 3.75 percent.

In Asia, the dollar was down 0.29 percent against Japan’s yen at 139.71 yen per dollar, after rising 0.37 percent the previous day.

The onshore and offshore yuan eased to their weakest in six months against the dollar, further pressured by economic worries.

Data released on Wednesday showed China’s exports shrank much faster than expected in May while imports extended declines, raising doubts about the country’s fragile economic recovery.

Meanwhile, the Turkish lira slipped to a record low of 23.39 per dollar in early Asia trading. It remained under pressure, last at 23.36.

By Harry Robertson and Rae Wee