The dollar traded mostly unchanged in early European trading, on the back foot as risk appetite returned to foreign exchange markets ahead of the European Central Bank’s policy-setting meeting.
The dollar index which tracks the U.S. currency against a basket of six other currencies traded at 92.767.
The EUR/USD gained 0.1% to 1.1797, climbing from Wednesday’s 3-½-month low of 1.1752. The USD/JPY dropped 0.1% to 110.94. Another important currency pair the GBP/USD added 0.2% to 1.3752. The risk-sensitive AUD/USD gained 0.2% to 0.7371.
Risk appetite returned to the markets, causing the safe-haven dollar to backtrack a little, after fears that the rise of COVID-19 cases would hit the global recovery triggered a sharp selloff in equities and riskier currencies earlier in the week.
Dollar and central banks
Attention now turns to Europe with the European Central Bank set to present its latest policy decision in several hours. The new inflation target, and its possible effects on monetary policy, will be the main topic of the meeting. Hopes are high that the central bank will come up with a dovish surprise. The ECB’s President Christine Lagarde understands the need for a forceful policy response to prevent a de-anchoring of inflation expectations.
In 2020, the European Central Bank adopted an emergency bond-buying program to cope with the economic shock from the pandemic. This bond-buying program is currently set to last until March 2022 and total up to $2.2 trillion.
The European Central Bank effectively hiked its inflation target to a symmetric 2% target over the medium term. Last year, the Federal Reserve also announced that it would allow inflation to run batter than normal. The Fed wanted to support labor as well as economic recovery.
The ECB’s meeting is not the only central bank meeting that will take place on Thursday. The South African Reserve Bank will probably keep the benchmark interest rate unchanged. South Africa’s central bank will also probably lower its economic growth forecasts. Soft Africa is struggling to deal with the third wave of Covid-19 restrictions and deadly riots.
Additionally, Ukraine is set to keep its benchmark interest rate at 7.5%, unchanged for the second month in a row. The country lifted borrowing costs in 2021 as consumer prices began to ramp up.
At 3 AM ET, the USD/ZAR dropped 0.2% to 14.5679, and USD/UAH gained 0.1% to 27.232.