Dollar Edges Higher; Boosted by Hawkish Fed Officials, Pelosi Visit

By Peter Nurse

Investing.com - The U.S. dollar edged higher in early European trade Wednesday, maintaining the overnight gains on raised geopolitical tensions and after Federal Reserve officials pointed to more rate hikes ahead.

At 02:55 AM ET (0655 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 106.263, after rebounding 1% overnight following its slide to a nearly one-month low at 105.03.

Data released Tuesday showed the number of vacancies across the U.S. fell more sharply than expected in June to its lowest level since September, an ominous precursor to Friday’s official employment report.

However, this sign of a cooling U.S. labor market was not enough to persuade Fed policymakers that now was the time to ease back the central bank’s aggressive monetary policy tightening. 

A trio of Fed officials, including known doves San Francisco Fed President Mary Daly and Chicago Fed President Charles Evans, signaled on Tuesday that there would be no let-up in the hefty rate hikes, even though they could significantly curb economic activity.

This resulted in U.S. Treasury yields climbing, with the United States 2-Year back past 3%, lifting the dollar index by the most in about three weeks. 

The dollar also received some demand from safe-haven flows after U.S. House of Representatives Speaker Nancy Pelosi visited Taiwan, a territory that is still claimed by China.

Pelosi is the highest-ranking U.S. official to visit the island in 25 years, and her presence in Taiwan threatens to further destabilize Sino-U.S. ties. 

“It is hard to predict how this new geopolitical thread will develop, and for now we simply highlight that this may be the trigger for an upside correction in the dollar today or in the coming days,” said analysts at ING, in a note.

USD/JPY rose 0.1% to 133.25, weighed by the rising U.S. Treasury yields, with the recent recovery by the yen over the past week coming to a halt after the Japanese currency had recorded its strongest four-day run since the early days of the COVID pandemic.

EUR/USD fell 0.1% to 1.0155, ahead of the release of Eurozone PPI and retail sales data, while GBP/USD fell 0.1% to 1.2167, with the Bank of England widely expected to raise its benchmark rate by 0.5% to 1.75% on Thursday.

This hike has largely been priced in, and traders will focus on the central bank signals for the rest of the cycle.

AUD/USD rose 0.1% to 0.6927, while USD/CNY was largely unchanged at 6.7537 despite a private survey showing that service sector activity in the mainland expanded at a faster pace in July than the prior month.