Dollar Edges Lower; Powell Testifies on Capitol Hill This Week

The U.S. dollar edged lower in early European trade Monday, in line with the wider increase in risk sentiment, but remained elevated with the U.S. Federal Reserve seen retaining an aggressive tightening stance. At 3:15 a.m. ET (0715 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 103.990.

The U.S. central bank announced an interest rate increase of 75 basis points last week, its largest hike since 1994, and traders will now focus on the testimony of Fed Chair Jerome Powell to the Senate and the House on Wednesday and Thursday for clues of future moves. St. Louis Fed President James Bullard warned that U.S. inflation expectations could “become unmoored without credible Fed action,” while former Treasury Secretary Lawrence Summers suggested that to counter price pressures, the U.S. jobless rate would need to rise above 5% for a sustained period. Another two Federal Reserve policy-makers are also due to speak later in the day, while the economic data calendar centers around housing data, with existing home sales for May due at 10:00 a.m. ET (1400 GMT).

USD/JPY was up 0.1% at 135.19, not far off a 24-year low of 135.58 yen hit last week, as the Bank of Japan retained its accommodative monetary policy stance even as a number of major central banks raised rates. Japanese Finance Minister Shunichi Suzuki said earlier on Tuesday that he was concerned about the recent sharp yen weakening and would appropriately respond to exchange market moves if necessary.

“A hawkish tone by Powell during his testimony this week may well generate fresh weakness in the yen,” said analysts at ING, in a note. “We have long discussed how FX intervention is not a straightforward policy move for G7 countries, but it’s hard to argue that this remains the only option on the table for Japanese authorities unless Treasury yields start to drop.”

Elsewhere, EUR/USD rose 0.4% to 1.0549, after European Central Bank President Christine Lagarde confirmed on Monday that the policymakers fully intend to hike interest rates in July and September despite growing concerns over rising bond yields on the Eurozone’s periphery. Investors will also be closely following the political situation in France after weekend elections delivered a hung parliament.

“The news doesn’t seem to have bothered the euro, and being more of a longer-term risk to the eurozone outlook, it is not too surprising. EUR/USD has once again found some anchor around the 1.0500 level,” ING added.

GBP/USD rose 0.5% to 1.2306, AUD/USD climbed 0.4% to 0.6977, helped by comments from Reserve Bank of Australia Governor Philip Lowe who reiterated Tuesday that further interest rate hikes are likely, while USD/CNY rose 0.1% to 6.6964 after China saw more COVID-19 flare-up in cities such as Shenzhen.