The U.S. dollar suffered minor losses in early European trade on Wednesday but remained near a one-month high as traders warily await the latest communications from the Federal Reserve after the recent jump in U.S. inflation.
At 2:55 AM ET (07:55 GMT), the dollar index was less than 0.1% lower at 90.468. The index which tracks the greenback against a basket of six other currencies reached a one-month high on Tuesday.
On Wednesday, USD/JPY was largely unchanged at 110.06, and it was near its two-month high of 110.325. GBP/USD gained 0.1% and reached 1.4087, above Tuesday’s one-month low of 1.4035. EUR/USD was slightly higher at 1.2128. The AUD/USD advanced 0.2% to 0.7698.
Elsewhere, USD/BRL fell marginally to 5.0426 ahead of the latest meeting of Brazil’s central bank. The Central Bank of Brazil is expected to lift its benchmark interest rate by 75 basis points, this time to 4.25%, matching its move in May. The central bank is struggling to cope with rampant inflation.
Policymakers are working hard to meet the central bank’s inflation goals. This year’s target is 3.75% with a 1.5 percentage point of error on either side, and 2022’s target is 3.50% with the same level of leeway. Data last week showed monthly inflation in May at a 25-year high for that month as well as the annual rate above 8% for the first time in 5 years.
Dollar and the country’s central bank
The Federal Reserve’s two-day meeting will end on Wednesday. The meeting is expected to culminate in an unchanged decision regarding monthly bond purchases and interest rates. Nonetheless, the backdrop of sharply rising inflation as the economy continues to recover appears to be keeping traders on edge.
The central bank is not ready to change its monetary policy. But markets will be looking for more information about its position. Further evidence of these inflationary pressures, and hence raised fears emerged on Tuesday. Balancing this out to a certain extent, May’s retail sales data came in weaker than expected.
The Federal Open Market Committee (FOMC) indicated it will first offer ample notice to the market before formally beginning the taper conversation. Also, FOMC is ready to give ample warning before formally announcing intentions to change its policy.
Ahead of the Fed’s meeting, at 2 PM ET markets will monitor the U.S. housing market, with housing starts and building materials data due for May.
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