Dollar Pulls Back from Recent Highs; Euro Boosted by German Economic Data

Investing.com – The U.S. dollar dipped slightly on Tuesday, yet stayed close to seven-week highs as traders evaluated the Federal Reserve’s monetary policy following last week’s robust jobs report.

As of 04:20 ET, the Dollar Index, which monitors the dollar against a basket of six other currencies, was down 0.2% at 102.139, after hitting a nearly two-month high on Friday.

Dollar Takes a Break from Gains

The strong payrolls report released on Friday has led traders to rethink the likelihood of rate cuts by the Federal Reserve. Expectations for a 50 basis point cut in November have diminished considerably, with the market now leaning towards a more conventional 25 basis point reduction.

The benchmark 10-year Treasury yield, which reflects these more tempered expectations, remained above 4% on Tuesday, while the two-year yield was near its highest level in over a month.

The dollar’s strength has also been supported by rising tensions in the Middle East, which have negatively impacted risk sentiment.

This week, several speeches by Federal Reserve officials are on the agenda, alongside the September inflation report and the minutes from last month’s Fed meeting.

“Limited spillover effects into foreign exchange from U.S. 10-year yields breaching the 4% mark have been noted. This seems to stem from payroll-induced positioning adjustments in dollar crosses,” remarked analysts from ING in a recent note.

“There’s a chance the foreign exchange market will pause its rate-driven movements now that the market has adjusted to the new 25 basis point per-meeting rate path set by the Fed. We anticipate that this week’s inflation data won’t lead to significant shifts in the dollar, which may instead react more to developments in the Middle East and fluctuations in oil prices.”

Euro Supported by German Industrial Production

In Europe, EUR/USD climbed 0.2% to 1.0995, buoyed by stronger-than-expected German industrial production data, which revealed a 2.9% increase in August compared to the previous month.

However, the less volatile three-month on three-month comparison indicated that production was down 1.3% from June to August compared to the prior three months.

The European Central Bank is set to meet next week, where it is anticipated to ease policy further after reducing rates twice this year due to decreasing inflationary pressures.

GBP/USD also increased by 0.2% to 1.3104, moving away from Monday’s three-week low of 1.3059. Additionally, data released earlier indicated that retail sales in Britain surged at their fastest pace in six months during September, rising 2% year-on-year, driven by a 3.1% increase in food retail, despite a 0.3% decline in non-food transactions.

Yuan Retreats After Holiday

USD/JPY dropped 0.4% to 147.55, correcting some of the significant gains seen in the past week. Data reflecting stable wage growth and household spending contributed to the strengthening of the Japanese currency.

Meanwhile, USD/CNY rose 0.5% to 7.0506, as trading resumed following a week-long break. Sentiment toward China improved due to a rollout of stimulus measures from the government, which included interest rate cuts, though these steps could add pressure on the yuan, especially with U.S. interest rates projected to stay elevated.