Dollar on defensive after pullback from nearly three-month peak

U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File photo

TOKYO  —The dollar remained under pressure on Wednesday after retreating from a nearly three-month high against the euro in the previous session with a decline in U.S. bond yields adding to the drag.

Analysts pointed to technical factors for the dollar‘s pullback, following a two-day rally of as much as 1.4 percent against the euro after unexpectedly strong U.S. jobs data and more hawkish rhetoric from Federal Reserve Chair Jerome Powell scuppered bets for an early interest rate cut.

U.S. Treasury yields also turned down from highs overnight on solid demand at a sale of new three-year notes, removing some support for the dollar.

READ: Powell says Fed can be ‘prudent’ in weighing rate cuts

The dollar was little changed at $1.0755 per euro in early Asia trade on Wednesday, after retreating 0.1 percent on Tuesday, when it had earlier touched the strongest level since Nov. 14 at $1.0722.

The U.S. dollar index – which measures the currency against six major peers, including the euro – was flat at 104.14, following Tuesday’s 0.29 percent slide. It had reached the highest since Nov. 14 at 104.60 on Monday.

Bullish daily structure

“The U.S. dollar can be excused for being the weakest FX major on Tuesday, as it simply looks like a retracement against that bullish two-day move between Friday and Monday,” said Matt Simpson, senior market analyst at City Index.

“But let us not lose sight of the fact that the U.S. dollar index retains a bullish daily structure,” and a pullback could set it up for the next leg higher, he said.

The dollar was steady at 147.905 yen, after sliding 0.49 percent overnight. The currency pair tends to be extremely sensitive to moves in Treasury yields.

Analysts and traders highlight next Tuesday’s U.S. CPI data as a key test for rate bets.

READ: Fed’s inflation puzzle still missing a piece or two

Traders are currently pricing in a 19.5-percent chance of a cut in March, the CME Group’s FedWatch Tool shows, compared with a 68.1-percent chance at the start of the year.

“Financial markets are in the process of recalibrating their expectations for Federal Reserve policy,” said James Kniveton, senior corporate forex dealer at Convera.

“If positive economic data, particularly on inflation, persists in the U.S., the tide could turn towards earlier rate cuts, potentially weakening the greenback further.”