The euro slipped against the dollar on Thursday as traders scaled back expectations of further aggressive interest rate cuts by the European Central Bank (ECB). Currency market activity was subdued due to the Thanksgiving holiday in the United States, which closed U.S. stock and bond markets.
The Japanese yen fell to 151.58 per dollar, though it has rebounded by 2.1% this week, erasing losses incurred after the U.S. election. The yen is on track for its strongest weekly performance in three months, with markets pricing in a 53% chance of a Bank of Japan rate hike next month.
The dollar index edged higher to 106.21, recovering from a two-week low of 105.85 hit on Wednesday. Michael Brown, a senior research strategist at Pepperstone, suggested the dollar is likely to strengthen as December begins, despite recent moves seeming “detached from fundamentals.” He pointed to ongoing challenges in the eurozone, including French budget concerns, as factors supporting the dollar.
The euro dropped 0.2% to $1.0546 after rising sharply on Wednesday. The gain followed hawkish comments from ECB board member Isabel Schnabel, which prompted investors to temper expectations of deeper rate cuts and buy euros. However, the euro remains on track for its worst monthly performance in over two years.
Data showing flat annual inflation in Germany for November, against expectations of a rise, has increased focus on eurozone inflation figures due Friday, which could influence the ECB’s next moves. Money markets now largely expect a modest 25-basis-point rate cut by the ECB in December, down from last week’s higher expectations of a 50-basis-point cut.
Sterling held steady at $1.2666, while Sweden’s crown strengthened against both the dollar and the euro after data showed improved business and consumer sentiment in November. The Australian dollar edged up to $0.6501 following earlier losses. Reserve Bank of Australia Governor Michele Bullock noted that core inflation remains too high to justify rate cuts in the near term.
In emerging markets, Russia’s rouble gained slightly to just over 110 per dollar as the Russian central bank announced it would suspend foreign exchange purchases until year-end to stabilize the currency. Meanwhile, Brazil’s real hit a record low amid concerns about tax cuts straining the national budget. South Korea’s won weakened slightly after an unexpected second consecutive rate cut by the central bank, a move foreseen by only a few economists.
Trading overall remained muted, with limited movements expected until after the holiday period.
