The rise of the dollar makes you breathe easy on the eve of the ECB

On Wednesday, the dollar took a breather in its gains, retreating slightly from multi-month highs as the risk-aversion weakened, although sales were marginal as expectations of european central bank caution pressed the euro.

 

The euro hit a new three-month low of $1.1755 overnight, and its slight rebound only brought it to $1.1780 by the start of the Asian session.

 

The Australian and New Zealand dollars also rose from annual lows, while the pound soared from a five-month low.

 

But these movements had little effect on the dollar's monthly rise, with even a 0.5% overnight jump in the Canadian dollar leaving it below the 200-day moving average.

 

"The U.S. dollar does seem to have significant support," said Westpac analyst Sean Callow of Sydney.

 

The dollar's rise has been driven largely by expectations that U.S. economic power could lead to higher interest rates, but has been helped a bit recently by risk aversion, he said.

 

"The overall sentiment on the dollar looks as if it will take a lot of effort to disrupt the underlying scenario where the dollar is in pretty good shape from now until the Jackson Hole conference," he added, referring to the August Symposium in Wyoming, where the Federal Reserve may announce a reduction in bond purchases.

 

"For now, you'll probably just prefer to keep long dollars for the next few weeks."

 

Analysts noted that the US dollar index, which last peaked at 92.971 and rose 2.8% since mid-June, seems ready to test the March peak of 93.439.

 

The dollar also rose slightly against the safe Japanese currency to buy 109.96 yen, after falling to 109.07 yen this week as new concerns about new coronavirus cases around the world forced investors to go for safer assets.

 

Viral infections, and especially the contagious delta variant, continue to pull Asian currencies other than the yen as new lockdowns have been introduced from Seoul to Sydney.

 

Sterling has also faced pressure as Covid-19 cases soar while England lifts most social restrictions, believing vaccines will prevent hospital overcrowding.

 

The pound was at $1.3631 for the last time, from Tuesday's five-month low of $1.3576, but below its 20-day and 200-day moving averages.

 

The Australian dollar was trading at $0.7319 after touching $0.7300 overnight and the kiwi was trading at $0.6916 from a low of $0.6882. The Canadian dollar was trading at C$1.2687 per dollar.

 

With an easy data calendar on Wednesday, traders are looking forward to the European Central Bank meeting on Thursday. The dovine tone is expected after President Christine Lagarde predicted a change in leadership during an interview last week.

 

The ECB announced a new strategy that allows the bank to tolerate inflation above the 2% target, and Lagarde said the policy guidance would be revised to demonstrate the bank's commitment to the new target.

 

"No change in the ECB's bias is unlikely to be enough to send the euro higher," ING analysts said in a note. "At the same time, any shift by the ECB towards a dovish interpretation of the strategic review will underscore the recent downward trend in the euro/dollar."