Dollar Dips Near Three-Week Lows Amid Fed Caution and New Zealand Rate Cut Signals

The dollar traded close to its three-week lows amid cautious remarks from Federal Reserve Chair Jerome Powell, which kept market sentiment in check. The New Zealand dollar fell after the country's central bank hinted at potential rate cuts. The euro showed slight gains ahead of a significant CPI report in the U.S.

The dollar hovered near three-week lows on Wednesday as a cautious tone from Federal Reserve Chair Jerome Powell maintained a risk-averse market atmosphere, while the New Zealand dollar took a hit following the central bank's suggestion of potential rate cuts.

In his testimony to Congress, Powell mentioned that the Fed needs 'greater confidence' that inflation is progressing towards the 2% target before considering rate cuts. This statement sets up Thursday's CPI report as a crucial indicator for future monetary policy.

The dollar index marginally fell to 105.05, remaining subdued after briefly dipping to its lowest since June 13 due to weak U.S. payrolls. Traders are now recalibrating their forecasts, putting a 73% chance on a rate cut by September. Market activity is expected to remain muted until the CPI data is released.

Commerzbank FX strategist Michael Pfister commented, 'Powell essentially reiterated his previous cautious stance. The market's focus is now squarely on the CPI report.'

Post-testimony, Powell will address the House later. The euro nudged up to $1.0826, still below its recent peak, amidst uncertainties in French politics following an inconclusive election. Conversely, the New Zealand dollar plunged 0.8% as the Reserve Bank of New Zealand signaled possible rate cuts if inflation meets expectations.

Senior market analyst Kyle Rodda noted that the RBNZ's increased confidence in hitting its inflation target hints at potential early policy easing. The Australian dollar surged to NZ$1.110, its highest since October 2022, while the U.S. dollar inched up against the yen, with markets eyeing the Bank of Japan's upcoming meeting.

Sources suggest the BOJ might lower its growth forecast but expect inflation to hover around 2%, fueling speculation about a potential rate hike.

(With inputs from agencies.)