FOREX-Dollar steady as traders weigh higher-for-longer US, global rates

The dollar was on the back foot on Thursday, though it drew some support from higher U.S. Treasury yields as traders contemplated the possibility of another rate hike by the U.S. Federal Reserve, even if it pauses next week. Surprise rate increases by the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) this week have caused markets to raise their expectations that global central banks still have further to go in their tightening cycle, while bets of rate cuts later this year have also trimmed.

The dollar was on the back foot on Thursday, though it drew some support from higher U.S. Treasury yields as traders contemplated the possibility of another rate hike by the U.S. Federal Reserve, even if it pauses next week.

Surprise rate increases by the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) this week have caused markets to raise their expectations that global central banks still have further to go in their tightening cycle, while bets of rate cuts later this year have also trimmed. The BoC on Wednesday hiked its overnight rate to a 22-year high of 4.75% after a four-month pause, while the RBA on Tuesday similarly raised interest rates by a quarter-point to an 11-year high and warned of more to come.

The Canadian dollar was last marginally higher at C$1.3363 to the greenback, after rising to a one-month top of C$1.3321 in the previous session. "Canada's central bank is viewed as one of the leaders when it comes to being proactive with monetary policy," said Edward Moya, senior market analyst at OANDA.

"The BoC is signaling that more rate hikes could come and that has everyone rethinking that the Fed will be done after the July hike." Elsewhere, the U.S. dollar dipped slightly in Asia trade, with sterling rising 0.13% to $1.2455, while the euro gained 0.14% to $1.0712.

European Central Bank policymakers had on Wednesday struck a hawkish tone and guided that more rate hikes are on the horizon, with interest rates likely to stay higher for longer. Against the yen, the greenback slipped 0.28% to 139.76 , with the Japanese currency buoyed by Thursday's revised data showing Japan's economy grew more than initially thought in January-March.

The U.S. dollar index fell 0.08% to 103.96, though its losses were capped by still-elevated U.S. Treasury yields. The two-year Treasury yield, which typically moves in step with interest rate expectations, last stood at 4.5608%, after touching a more than one-week high of 4.604% in the previous session.

The benchmark 10-year yield was last at 3.7876%, having risen roughly 10 basis points to peak at 3.801% on Wednesday. Money markets are now pricing in almost a one-third chance that the Fed raises rates by 25bps at its policy meeting next week.

"Based on recent Fed communication, we think the central bank is leaning toward skipping a rate hike at this meeting and potentially tightening more later," said economists at ANZ, referring to next week's FOMC meeting. "We expect the FOMC to upgrade its GDP and inflation forecasts for 2023, and thus a higher terminal rate view is a possibility."

CHINA SLUMP In Asia, the onshore and offshore yuan eased to their weakest in six months against the dollar, further pressured by concerns that China's post-pandemic economic recovery is losing momentum.

Data released on Wednesday showed China's exports shrank much faster than expected in May while imports extended declines, raising doubts about the country's fragile economic recovery. "To some extent, it's a view that the trade data's another symptom of a faltering recovery," said Ray Attrill, head of FX strategy at National Australia Bank.

The Aussie was last 0.17% higher at $0.6664, having slipped nearly 0.3% in the previous session, while the kiwi rose 0.24% to $0.6051, reversing some of Wednesday's 0.7% fall. Both antipodean currencies are often used as liquid proxies for the Chinese yuan.

In other currencies, the Turkish lira slumped to a record low of 23.39 per dollar in early Asia trade, and remained under pressure at 23.33.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)