The dollar is set to take its cues from the U.S. Federal Reserve’s policy statement and a speech by President Joe Biden on Wednesday, as it seeks to extend recovery from an eight-week low touched earlier in the week against a basket of currencies.
The dollar index stood at 90.968, bouncing from Monday’s low of 90.679, its lowest level since March 3, though investors are not convinced if its downtrend since late March has ended.
The greenback’s decline stemmed largely from receding bets that the Federal Reserve could start laying the groundwork for future policy tightening soon as the U.S. economy rapidly recovers.
On Wednesday, the U.S. central bank is widely expected to maintain its policy settings, and Fed Chairman Jerome Powell is seen as likely to repeat his dovish message.
But some analysts say signs of rising inflation expectations could nudge the Fed to abandon its rhetoric that a policy tightening is still a long way off.
Investors’ inflation expectations, measured by break-even inflation (BEI) rate calculated from U.S. inflation-linked bonds, rose above 2.40% on Tuesday, the highest level since 2013.
The Federal Reserve said last year it aims to bring average inflation to around 2% and to allow it to overshoot above 2%, rather than trying to cap it around 2%.
The euro slipped 0.1% to $1.2080, off Monday’s two-month high of $1.2117.
The dollar stood at 108.85 yen, having jumped 0.59% overnight and extending its recovery from a seven-week low of 107.48 touched last week, in tandem with rises in U.S. bond yields.
The yen was on the back foot also as Japan’s economic recovery is being hampered by recent surges in COVID-19 cases and after the Bank of Japan acknowledged that inflation will fail to reach its key 2% target through early 2023.
The Japanese currency slipped even against low-yielding European currencies, hitting a 2-1/2-year low versus the euro, at 131.57 per euro and a five-year low on the Swiss franc, at 119.20 per franc.
Besides the Fed, investors are looking to President Biden’s first address to a joint session of Congress, also scheduled later on Wednesday.
Biden is expected to roll out a plan to raise taxes on the wealthiest Americans, including the largest-ever increase in levies on investment gains, to fund about $1 trillion in childcare.
News reports about his tax-hike plan dented markets’ risk appetite only briefly on Friday but analysts think there could be a bigger reaction if the plan becomes more concrete.
“In addition to tax policies that have resurfaced as a market focus, his stance on diplomacy should attract some attention given recent tensions with China and Russia,” said Shinichiro Kadota, senior strategist at Barclays.
Elsewhere, the Australian dollar dropped 0.35% to $0.7739 after the country’s consumer price came in weaker than expected.