The dollar weakened against a basket of currencies on Tuesday, reflecting a decline in Treasury yields as investors awaited important U.S. economic data ahead of the Federal Reserve’s monetary policy meeting next week.
In the previous session, the dollar index lost over 0.5% and currently sits around 105.57 as U.S. Treasury yields fell.
Last week, the greenback received support after Fed Chair Jerome Powell suggested that U.S. economic strength might justify tighter financial conditions, causing the benchmark 10-year yield to rise above 5% to its highest level since July 2007.
Bitcoin gained attention in the market as the virtual currency surged amid speculation that the United States could soon approve a bitcoin exchange-traded fund.
Market focus now shifts to the remaining U.S. economic data before the Fed’s meeting on Oct. 31 – Nov. 1, with the flash purchasing managers’ index (PMI) set to be released later on Tuesday and gross domestic product (GDP) data due on Thursday.
According to Matt Simpson, senior market analyst at City Index, the PMI data could shape market expectations ahead of the GDP report.
“If the data strongly leans in one direction, it could trigger a significant rally or breakdown in the dollar, especially considering the Fed’s blackout period,” he said, referring to the period before the policy meeting when central bank officials are limited in their public communications.
The Fed is expected to keep rates unchanged at its meeting next week.
Similarly, the European Central Bank is anticipated to leave interest rates untouched at its meeting on Thursday, following a 25 basis point increase in September.
The euro remained mostly unchanged at $1.0665, maintaining its gains against the dollar from Monday.
Meanwhile, the dollar’s retreat provided some relief for the struggling yen. The Japanese currency had reached the critical 150-level on both Friday and Monday and is currently flat against the greenback at 149.77.
Traders view the 150 threshold as a potential trigger for Japanese authorities to intervene in the currency market.
However, if the U.S. data this week proves to be strong, it could push the yen back into the danger zone.
“The yen will be particularly sensitive to strong U.S. data, especially if it causes Treasuries to surpass the key resistance level of 5%,” said Kyle Rodda, senior financial market analyst at Capital.com.
In the cryptocurrency market, bitcoin surged by as much as 14% to reach a 2-1/2 year high of $34,283.
Reporting by Brigid Riley. Editing by Sam Holmes.
