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Currency Market Update: Dollar Hit by PMI Data, Aussie Soars on Inflation Surprise

On Wednesday, the dollar found itself reeling from significant losses against the euro and sterling, while the yen remained entrenched near 34-year lows despite heightened intervention warnings from Japanese officials.

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The dollar’s widespread decline overnight was propelled by a confluence of factors, including unexpectedly strong economic data from Europe and a moderation in business growth in the United States.

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Meanwhile, the Australian dollar capitalized on the dollar’s weakness, surging on the heels of higher-than-anticipated domestic consumer price figures. This surge led market participants to discard expectations of any imminent rate cuts by the Reserve Bank of Australia.

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As of 0500 GMT, the Aussie had climbed 0.45% to $0.65185, reaching as high as $0.6530 for the first time since April 12. Over the past two days, the currency had already rebounded by more than 1% after hitting a five-month low last Friday.

James Kniveton, senior corporate FX dealer at Convera, remarked, “This overshoot likely removes any chance of RBA cuts this year. The Australian dollar has benefited from a re-evaluation of the RBA’s monetary policy path, but geopolitical risks remain.”

The U.S. dollar index, which gauges the greenback against six major counterparts including the euro, sterling, and yen, remained flat at 105.67 after touching its lowest point since April 12 at 105.59. It experienced a 0.4% decline overnight.

The euro saw marginal movement, holding steady at $1.0705 following a 0.45% increase on Tuesday, buoyed by data indicating robust business activity in the eurozone, primarily driven by a services sector recovery.

Similarly, sterling enjoyed a boost from overnight data showing accelerated growth in British business activity. Bank of England Chief Economist Huw Pill’s statement that interest rate cuts were still distant further lifted the pound, which was last up 0.06% at $1.2455, having surged 0.79% in the prior session.

In contrast, U.S. business activity softened in April, reaching a four-month low due to weakened demand, accompanied by a slight easing in inflation rates, hinting at potential relief for the Federal Reserve.

Market attention now turns to Friday’s release of the Fed’s preferred consumer inflation gauge, the PCE deflator. According to the CME’s FedWatch tool, markets currently assign a 73% probability of a rate cut by September.

Kyle Rodda, senior financial markets analyst, commented, “The story remains that the U.S. economy is pretty resilient, and as long as we’ve got the U.S. economy in this position – with even the possibility of more Fed rate hikes – the risks for the U.S. dollar are still skewed to the upside.”

Last week, the dollar index reached a 5-1/2-month high of 106.51 as persistent inflationary pressures prompted Fed officials to signal a patient approach to policy easing.

Despite Tuesday’s broader dollar weakness, it managed to briefly hit a fresh 34-year high against the yen at 154.88.

This week, the dollar-yen pair oscillated within an extremely narrow range between that high and a low of 154.50, with traders cautious of breaching 155, which could trigger Japanese intervention to curb dollar strength. The dollar was last barely changed at 154.835 yen.

Japanese Finance Minister Shunichi Suzuki issued the sternest warning yet on intervention, suggesting Tokyo’s readiness to counter excessive yen movements following discussions with U.S. and South Korean counterparts.

The Bank of Japan is widely anticipated to maintain policy settings and bond purchase levels unchanged at the conclusion of its two-day meeting on Friday, having raised interest rates for the first time since 2007 just last month.

While the central bank may signal readiness for further policy tightening this year, its ultra-cautious, data-dependent stance has constrained yen appreciation.

“Besides the financial ramifications, failed FX intervention could severely dent the credibility of Japanese authorities,” Rab [remainder of the sentence is missing].

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