The dollar eased, but remained supported close to four-month highs against a currency basket on Wednesday ahead of a Federal Reserve meeting that is expected to point to another two or possibly even three rate hikes this year.
The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was down 0.21% to 92.09 by 03:27 AM ET (07:27 AM GMT), easing from Tuesday’s highs of 92.37, the strongest level since January 9.
Demand for the dollar continued to be underpinned after data on Tuesday indicated that while U.S. factory activity slowed slightly in April inflationary pressures are building.
Another report earlier this week showed that the Fed’s preferred measure of inflation accelerated to its highest in more than a year in March, while data last week showed that wages grew at their fastest pace in in eleven years in the first quarter.
Rising inflation would be a catalyst to push the Fed toward raising interest rates at a faster pace than currently expected.
While the Fed is expected to keep interest rates on hold at the conclusion of its policy meeting later Wednesday policymakers are widely expected to line up their next rate hike in June.
Markets are also looking ahead to Friday’s U.S. employment report for April, which could provide further signs of strength in the world’s largest economy.
The dollar edged lower against the yen, with USD/JPY dipping 0.07% to 109.77, still within close reach of the three month high of 109.91 set overnight.
The euro was a touch higher, with EUR/USD rising 0.3% to 1.2027, pulling back from Tuesday’s low of 1.1980, which was the weakest level since January 11.
Traders were looking ahead to preliminary data on euro zone first quarter growth later in the day, which was expected to show that growth in the region slowed slightly at the start of the year.
A weak reading would further undermine the case for the European Central Bank to start scaling back its stimulus program in the coming months.
The pound remained close to four-month lows, with GBP/USD at 1.3619 after data on Tuesday showing that activity in the UK manufacturing sector grew at the slowest pace in seventeen months in April.
The report saw investors slash expectations for a rate hike from the Bank of England at its upcoming meeting next week after overall economic growth slowed to near stagnation in the first quarter.
Meanwhile, the Australian dollar gained ground, with AUD/USD rising 0.44% to 0.7524 after falling to an 11-month low overnight.
The New Zealand dollar was also higher, with NZD/USD up 0.29% of 0.7025 from an overnight low of 0.6989.
