The dollar was hovering just below four-month highs against a currency basket on Wednesday as investors awaited the outcome of a Federal Reserve meeting that is expected to point to another two or possibly even three rate hikes this year.
The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, dipped 0.09% to 92.20 by 06:03 AM ET (10:03 AM GMT), holding just below Tuesday’s highs of 92.37, the strongest level since January 9.
Demand for the dollar continued to be underpinned after data on Tuesday indicated that while U.S. factory activity slowed slightly in April inflationary pressures are building. Another report earlier this week showed that the Fed’s preferred measure of inflation accelerated to its highest in more than a year in March, while data last week showed that wages grew at their fastest pace in in eleven years in the first quarter.
Rising inflation would be a catalyst to push the Fed toward raising interest rates at a faster pace than currently expected. While the Fed is expected to keep interest rates on hold after its meeting later Wednesday policymakers are widely expected to line up their next rate hike in June. Markets are also looking ahead to Friday’s U.S. employment report for April, which could provide further signs of strength in the world's largest economy.
The dollar was almost unchanged against the yen, with USD/JPY last at 109.82, within close reach of the three month high of 109.91 set overnight. The euro came off the best levels of the day, with EUR/USD last at 1.2002, not far from Tuesday’s low of 1.1980, which was the weakest level since January 11. The euro pared back gains after data showed that growth in the euro zone economy slowed in the first quarter, further dampening expectations that the European Central Bank will soon start scaling back stimulus.
Another report showed that activity by euro zone manufacturers cooled in April, but still remained solid. The pound pulled up from four-month lows, with GBP/USD rising 0.31% to 1.3654 after a report showing that activity in the UK construction sector rose at the fastest pace in five months in April. The report came a day after a similar survey showing that activity in the UK manufacturing sector grew at the slowest pace in seventeen months in April.
Recent weakness in economic data has seen investors slash expectations for a rate hike from the Bank of England at its upcoming meeting next week.