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Dollar Drops From Two-Year High; Euro Bounces Off New Lows

Forex Apr 07, 2022 09:22
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By Peter Nurse

Investing.com - The U.S. dollar edged lower in early European trade Thursday, but still remained close to a two-year high after minutes from the last Federal Reserve meeting showed policymakers were preparing to move aggressively to head off inflation.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 99.520, just below Wednesday's high of 99.78 which was its highest since May 2020. 

Wednesday saw the release of the minutes from last month’s Federal Reserve policy meeting when the central bank raised interest rates for the first time since 2018.

They showed the policymakers have laid out a plan to shrink their balance sheet by more than $1 trillion a year, and also indicated that “many” viewed one or more half-point increases as possibly appropriate going forward if price pressures fail to moderate.

While this content was broadly within expectations, the Fed’s determination to move quickly and aggressively to combat inflation gave the dollar a boost.

“Our short-term fair value model shows that, for some G10 pairs (like EUR/USD), the greenback remains undervalued,” said analysts at ING, in a note. “This suggests the dollar still has some room to catch up with the big moves in rates (a major determinant of its short-term fair value), and we think a consolidation around these higher levels is more likely than a correction at this stage.”

EUR/USD rose 0.2% to 1.0918, rebounding after hitting a one-month low of 1.0874 on Wednesday as fresh sanctions were levied on Moscow after allegations of atrocities by Russian troops in Ukraine.

Also weighing on the single currency are the rising chances of the far-right, anti-EU Marine Le Pen winning the French presidential elections this month, with the first-round vote taking place on Sunday.

“Le Pen’s stance on a number of EU-related issues (like an exit from the EU) has softened since the 2017 election campaign, but her impact on the stability of the EU is still perceived to be quite significant,” ING added.

The minutes from the European Central Bank’s last meeting are due later in the day and are unlikely to be anything as hawkish as the Fed's with the bloc’s central bank having to cope with slumping growth in the wake of the Ukraine war even as Eurozone inflation soared to a record high of 7.5%.

"Quarter-on-quarter growth rates will be very low this year," ECB board member Fabio Panetta said in a speech Wednesday. "The adverse impact of the war could well bring them into negative territory and produce longer-lasting effects."

Elsewhere, USD/JPY fell 0.1% to 123.70, near a one-week high, GBP/USD rose 0.2% to 1.3086, AUD/USD fell 0.3% to 0.7491, while USD/CNY was largely unchanged at 6.3612.

Dollar Drops From Two-Year High; Euro Bounces Off New Lows
 

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