Dollar hovers near three-month highs as traders gauge rates outlook

The dollar dipped slightly on Thursday but stayed near three-month highs after the Bank of Canada raised interest rates unexpectedly, implying that other central banks, including the Federal Reserve, may have more work to do to contain inflation.

Early in the European day, the euro was up 0.1% at $1.071 against the dollar, the most traded currency pair in global markets.

This helped knock the dollar index, which compares the currency to six main counterparts, down to 104. However, it stayed close to last week’s summit of 104.7, the highest since March 15.

The dollar had been under pressure on Wednesday, but it surged higher versus the euro and the Japanese yen after the Bank of Canada stunned markets by hiking interest rates to 4.75%. It came after the Reserve Bank of Australia raised interest rates on Tuesday.

The US dollar was down 0.16% against the Canadian dollar, trading at C$1.335, after sliding 0.24% on Wednesday.

The Australian dollar rose 0.43% to $0.668, bringing its monthly gains to over 2.7%. Sterling was up 0.1% at $1.245.

According to derivative market pricing, traders now believe the Fed will maintain rates steady next week, with a 30% possibility of a 25 basis point (bp) hike.

They believe the Fed will hike rates by 25 basis points in July after officials hinted at a “skip.” The Fed funds rate would rise to a range of 5.25% to 5% as a result.

The European Central Bank sets rates on Thursday, and traders anticipate a 25 basis point increase, followed by another 25 basis point increase in July, bringing rates to 3.75%.

In Asia, the dollar was down 0.29% versus the Japanese yen, trading at 139.76 yen per dollar, after climbing 0.37% the day before.

The onshore and offshore yuan fell to its lowest level in six months versus the dollar, weighed down by economic concerns.

China’s exports fell considerably quicker than predicted in May, while imports continued to fall, increasing concerns about the country’s shaky economic recovery.

Meanwhile, in early Asia trade, the Turkish lira fell to a record low of 23.39 per dollar. It continued under pressure, with the last reading at 23.37.