The US dollar’s recent decline paused on Thursday as investors adopted a cautious stance ahead of a series of central bank meetings next week, with policymakers in Japan, the United States and Europe expected to keep interest rates unchanged while maintaining a firm stance on inflation.
Currency markets have continued to favour the dollar on expectations that the artificial intelligence boom will sustain US economic growth, allowing interest rates to remain elevated for longer.
However, recent gains in sterling and the currencies of Canada, Australia and New Zealand suggest that investors have reduced some of their bullish dollar positions. Trading movements remained modest on Thursday.
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Sterling remained near $1.33955 after reaching a one-month high of $1.3409 earlier in the week. The British currency has received support from stronger-than-expected inflation data, which has influenced expectations for the Bank of England’s interest rate outlook.
The Australian dollar traded at $0.7025, holding above the 70 US cent mark after reaching a three-week high on Wednesday.
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The New Zealand dollar climbed to a one-month high of $0.5709 amid expectations that the Reserve Bank of New Zealand could raise interest rates next week.
The Australian dollar has also drawn support from concerns over inflation. Reserve Bank of Australia Deputy Governor Andrew Hauser said on Wednesday that the inflation outlook had become “materially worse”, partly because of higher oil prices.
His comments strengthened market expectations that Australia’s next interest rate increase could come as soon as next month.
Meanwhile, the Canadian dollar remained near a one-month high of C$1.4032 per US dollar, supported by expectations that the Bank of Canada could raise rates next week.
Euro Faces Pressure From Fiscal Concerns
The euro and Japanese yen traded within relatively narrow ranges as investors assessed monetary policy prospects and other economic risks.
The yen remained around 158 per dollar, with the possibility of Japanese authorities intervening in currency markets and expectations of future interest rate increases providing some support.
The euro, meanwhile, has been under pressure for about a month and has become a favoured currency for investors betting on further dollar strength.
Concerns over France’s public finances and Europe’s vulnerability to energy shocks have weighed on sentiment. French 10-year government bond yields reached their highest level since 2022 on Wednesday.
Recent unrest across France, partly fuelled by proposed public service cuts, has also highlighted the political challenges facing efforts to reduce budget deficits.
Despite these pressures, the euro has remained relatively stable above $1.12, apart from a brief decline during thin trading in Asia on Monday.
Brent Donnelly, president of Spectra Markets, described the situation as a stalemate, with negative economic news offset by existing market positioning.
Central Banks in Focus Next Week
Investors are preparing for decisions from several major central banks, with markets largely anticipating unchanged rates in the immediate term but remaining alert to the possibility of further tightening.
The European Central Bank is expected to maintain its benchmark interest rate at 2.5% next week, although markets have largely priced in a rate increase before the end of the year.
In Japan, markets also expect the central bank to hold rates steady at its upcoming meeting, with the next increase to 1.5% anticipated early next year.
The US Federal Reserve is similarly expected to leave its federal funds target range unchanged at 3.75% to 4% in October, while financial markets anticipate a possible increase in December.
The decisions could influence currency movements in the coming weeks as investors weigh inflation, economic growth and the likelihood that borrowing costs will remain elevated for longer.
