On Tuesday, the dollar fell because of a drop in new home sales and a drop in social media stocks, which made people worry about a recession in the U.S. The dollar was stable when trading started on Wednesday.
On Tuesday, safe-haven flows caused U.S. bond yields to drop. This shows that the market is now more worried about growth than inflation. As a result, people are becoming less sure about where U.S. interest rates are going, which makes the greenback less strong than it has been in recent weeks.
At 3:25 AM ET (07:25 GMT), the Dollar Index, which compares the dollar to a group of countries with developed economies, was at 102.14, up 0.2% from Tuesday night. It has lost more than 1.7% in the last week as interest rate expectations have moved in favor of the euro and yen. However, it is still up about 6.8% for the year so far.
Overnight, the Reserve Bank of New Zealand raised its key rate by 50 basis points, bringing it to 2%. This added to the feeling that interest rate relationships are changing in a way that hurts the dollar. The RBNZ said that it was more likely that big increases now would stop inflation from staying high for too long. The kiwi grew by 0.6%, reaching a three-week high of 1.5350 to the dollar. It then lost some of its gains.
The euro is also being moved by the same debate, which is about whether bigger increases are needed to keep the public’s faith in central banks’ promises to keep inflation low. Christine Lagarde, the head of the ECB, said on Tuesday that only “gradual” rate hikes are needed as long as people’s expectations about inflation don’t become unanchored.
Others on the ECB’s governing council, like Austrian and Dutch central bank governors Robert Holzmann and Klaas Knot, have pushed for a 50 basis point hike already in July. However, Finnish central bank head Olli Rehn, a key swing voter on the governing council, sided with Lagarde on Wednesday, even though he did say that inflation risks had increased.
As a result, the euro fell by 0.5% to $1.0648.
Aside from that, the Central Bank of Russia said it will hold an emergency meeting this week. This comes amid rumors that the rise of the ruble will cause the bank to cut interest rates even more and maybe lift more of its capital controls. When Russia invaded Ukraine in February, the CBR raised its key rate to 20% and stopped almost all purchases of foreign currency by individuals and businesses. This was done to protect the ruble.
But because of Russia’s huge current account surplus, the currency is now, if anything, too strong. This is because money has kept coming in from energy exports while imports have dropped because of western sanctions. On Wednesday, the ruble went up by another 1.2%, making it worth 56.191% of a dollar. This is the highest it has been in over four years.