By Peter Nurse
Investing.com - The U.S. dollar edged lower in early European trade Wednesday, but remains near a two-decade high ahead of the release of key inflation data which could influence Federal Reserve thinking.
At 3:10 AM ET (0710 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, dropped 0.2% to 103.715 but remains near the high of 104.49 reached at the start of the week for the first time since December 2002.
EUR/USD rose 0.2% to 1.0551, stabilizing after falling to a more than five-year low at 1.0469 at the end of last month, while GBP/USD rose 0.1% to 1.2339, above the 22-month low of 1.2262 seen at the start of the week.
“Low-yielding currencies, including the pro-cyclical euro and pound, seem to be finding some favor from the markets, although prolonged market volatility and instability in sentiment look unlikely to generate any other winners outside of the dollar,” said analysts at ING, in a note.
Attention is focused on the April U.S. consumer price index reading later in the session, with traders looking for any signs inflation may be starting to cool. The index is expected to register an 8.1% annual increase compared with an 8.5% rise recorded in March.
The Federal Reserve raised its benchmark overnight interest rate by 50 basis points last week, the largest hike in 22 years and policymakers following this move have been keen to point to more moves of this size at future meetings, but not larger.
"I would say that (a 75-basis-point rate hike) is a low probability outcome given what I expect will happen in the economy over the next three to four months," Atlanta Federal Reserve President Raphael Bostic said in an interview earlier this week.
That said, there are some in the market that are still looking for a one-off hefty interest rate rise to enable the Fed to get ahead of the curve as far as monetary policy tightening is concerned.
USD/JPY dropped 0.1% to 130.29, slipping back after hitting a more than two-decade-high of 131.35 on Monday.
The yen has been in freefall for much of this year as the Bank of Japan maintains its low-yield policy while yields on U.S. Treasuries climbed relentlessly.
However, Goldman Sachs said, in a note, the currency now has “significant value,” saying it’s now 20-25% undervalued against the dollar and is the cheapest safe haven asset at a time when global recession risk is on the rise.
Elsewhere, USD/CNY fell 0.2% to 6.7222, after Chinese inflation data came in stronger than expected, with the consumer price index for April growing 0.4% month-on-month and 2.1% year-on-year, while the producer price index also rose 8% year-on-year.