The U.S. dollar edged higher on Wednesday, pulling away from a three month low as markets dialed back expectations for aggressive interest rate cuts by the Federal Reserve next month, but expectations for some monetary easing checked the currency’s gains.
Expectations for a half percentage point cut at the Fed’s July meeting receded after St. Louis Fed President James Bullard said Tuesday that such a move "would be overdone".
Separately, Fed Chairman Jerome Powell said the central bank is "insulated from short-term political pressures," pushing back against U.S. President Donald Trump's demands for a significant rate cut.
The comments tempered expectations for aggressive easing, but investors are still expecting at a quarter percentage point cut next month.
The U.S. dollar index against a basket of currencies edged up to 95.75 by 02:44 AM ET (06:44 GMT) on Wednesday, off a three-month low of 95.36 reached on Tuesday.
The dollar pushed higher against the yen, but remained within striking distance of five-month lows as heightened tensions between the U.S. and Iran underpinned demand for safe-haven currencies.
However, trading is likely to subdued as the focus shifts to a meeting between Trump and Chinese President Xi Jinping at a Group of 20 summit over the weekend, but expectations are low for a breakthrough that would end the dispute between the world’s two-largest economies.
“The dollar’s upside is heavy, particularly against the yen,” said Junichi Ishikawa, senior foreign exchange strategist at IG Securities.
“Powell is worried about curbing excess expectations, but Treasury yields are clearly heading lower and U.S. economic data are not looking great. A rate cut in July is a done deal.”
The U.S. currency was up 0.2% at 107.38 yen after falling to 106.79 on Tuesday, its lowest since its flash crash in early January.
The euro was little changed against the dollar at 1.1356, rowing back slightly from Tuesday’s three-month high of 1.141.
The British pound was down 0.2% at 1.2669 before the Bank of England publishes its closely-watched quarterly inflation forecasts later on Wednesday.
The BoE has said rates would need to rise in a gradual fashion as long as Britain avoids a no-deal exit from the European Union.
However, sterling remains dogged by concerns that eurosceptic Boris Johnson will become Britain’s next prime minister, increasing the chance of a no-deal Brexit.