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U.S. Dollar Rallies to 5-Week High Amid Questions Over ECB Stimulus Expectations

James Hyerczyk

The U.S. Dollar finished higher against a basket of currencies on Wednesday, continuing to draw support from Tuesday’s testimony from Federal Reserve Chair Jerome Powell. In his first question and answer session before Congress, Powell struck an optimistic tone on the U.S. economy while signaling to investors that the Fed may raise interest rates four times this year, one more than what markets had expected.

Daily March U.S. Dollar Index

March U.S. Dollar Index futures settled at 90.551, up 0.271 or +0.30%.

EUR/USD

Benign Euro Zone inflation data hurt expectations that the European Central Bank will dial back its stimulus, driving the Euro to five-week lows against the dollar.

Daily EUR/USD

On Wednesday, the EUR/USD settled at 1.2193, down 0.0040 or -0.32%.

According to reports released on Wednesday, Euro Zone inflation slowed to a 14-month low in February, underscoring why the European Central Bank remained cautious about removing stimulus despite growth exceeding expectations.

The report showed that inflation in the 19 countries sharing the Euro as their common currency slowed to 1.2 percent from 1.3 percent in January, in line with the forecasts, but well-below the ECB’s long-term elusive target of almost 2 percent.

Essentially, traders who priced in the possibility that the ECB will raise interest rates as early as by the end of this year, are dialing back their purchases of the Euro because they fear the central bank may decide to extend its bond buying and push back the rate hike into 2019. This would put even more pressure on the EUR/USD.

The Euro was also pressured by political uncertainties as Italians are preparing to vote in a national election on Sunday, while the leading political parties in Germany decide on a coalition deal that would secure Angela Merkel a fourth term as chancellor.

Daily GBP/USD

GBP/USD

The British Pound fell to its lowest level since January 17 on renewed concerns over Brexit after the European Union’s chief Brexit negotiator said a transition deal was not guaranteed while the prime minister said the EU’s draft legal text would undermine Britain.

The GBP/USD settled at 1.3758, down 0.0150 or -1.08%.

Daily USD/JPY

USD/JPY

A plunge in U.S. equity markets helped drive the Dollar/Yen sharply lower on Wednesday because of the carry-trade. Stock investors who liquidated their positions, sold dollars and bought Yen in order to pay back loans from Japanese banks. Traders should little reaction to the widening of the spread between U.S. government Bond yields and Japanese government Bond yields.

The USD/JPY settled at 106.674, down 0.642 or -0.60%.

Daily USD/CAD

USD/CAD

Another steep drop in crude oil prices, weak demand for higher risk assets, firm U.S. Treasury yields and expectations for higher interest rates later this year helped drive the U.S. Dollar higher against the Canadian Dollar.

The USD/CAD settled at 1.2831, up 0.0058 or +0.45%.

Crude oil prices plunged over 2 percent on Wednesday after the U.S. Energy Information Administration reported a sharp rise in crude and gasoline inventories.

This article was originally posted on FX Empire

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