Dollar near two-month highs after Fed minutes; yen remains weak

Investing.com - The U.S. dollar edged lower in early European trade Thursday but remains trading near two-month highs after the minutes from the last Federal Reserve meeting offered a hawkish slant.

At 03:00 ET (07:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 103.292, not far removed from the 2-month high of 103.59 seen overnight.

Dollar in demand after Fed minutes

The dollar saw more demand overnight after the minutes from the July Federal Reserve policy meeting showed that a number of officials still saw the potential need for more interest rate hikes, offering support for the U.S. currency.

“Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” according to minutes published Wednesday in Washington.

Additionally, the July Fed meeting came before a raft of U.S. data that underscored the resilient economy.

The latest example of this came from the real estate sector, as data on Wednesday showed that housing starts surged in July and permits for future construction rose.

Additionally, a separate report revealed industrial production climbed 1.0% last month, a sharp rebound from June’s 0.8% fall.

There’s more data to study later Thursday, with weekly initial jobless claims and the August Philadelphia Fed manufacturing index due.

Yen drop heightens intervention watch

USD/JPY edged lower to 146.31, with the yen now trading near its lowest level since November as the idea that the Fed could keep its interest rates at high levels for longer exacerbated the interest rate differentials between the U.S. and Japan's ultra-low rate environment.

Additionally, data showed that Japan logged a surprise trade deficit in July, while the country’s exports, particularly to China, contracted for the first time since 2021.

The pair crossed the key 145 level for the first time in about nine months last week, placing traders on intervention watch as this was the level that prompted moves by Japanese authorities to support the currency in September and October last year.

Euro close to six-week low

EUR/USD rose 0.1% to 1.0882, bouncing to a degree after falling to a six-week low on Wednesday, with second-quarter growth proving to be tepid in the eurozone, underperforming the more buoyant U.S. economy.

The region's largest economy, Germany, has been hit by a toxic mix of weak trading with key partner China as well as a slump in its large manufacturing and construction sectors, raising questions whether the European Central Bank will continue its hiking cycle in September.

Elsewhere, GBP/USD rose 0.1% to 1.2738, with the Bank of England still expected to hike interest rates next month even after the U.K. inflation slowed in July to its lowest annual rate since February 2022. 

USD/CNY rose 0.1% to 7.3045, with the yuan helped by reports that China’s major state-owned banks were selling U.S. dollars to snap up yuan, even after Fitch suggested that it may start considering a downgrade to China’s credit rating.

AUD/USD fell 0.3% to 0.6401, with the Aussie dollar weighed by China’s weakness, with the Asian giant a major export market for Australia’s raw materials, as well as data showing some cooling in its job market through July.