The euro fell to three-week lows on Friday as rising U.S. bond yields boosted the dollar before a speech by the head of the Federal Reserve, which some investors believe will see him signal reluctance to embark on a long rate-cut cycle.
Jerome Powell will address the Jackson Hole symposium of central bankers at 1400 GMT, and traders are waiting to see how closely he allies himself with the hawks within the Fed.
Currency markets have in recent months been driven by a shift at global central banks to looser monetary policy as economic demand slows and trade disputes intensify.
Expectations that the Fed will cut rates at its next meeting in September are still high, according to interest rate futures, but the currency market is likely to react if Powell's comments don't match the dovish expectations. Money markets price in at least two rate cuts of 25 basis points this year.
"I would expect him to stress that the U.S. economy is strong enough that ... just a rate cut or two, taken out as 'insurance', will be enough to keep the recovery on track," said Marshall Gittler, chief strategist at ACLS Global.
"That's probably more hawkish than what the market is expecting and could be positive for the dollar."
Bank of America Merrill Lynch has recently changed its forecast for euro/dollar, expecting the currency pair to fall to $1.08 by the end of the year, compared with $1.17 earlier.
"You can make the argument that dollar strength is likely to persist longer than previously expected," said Kamal Sharma, G10 forex strategist at BAML.
The euro was down 0.2% at $1.1055, a three-week low, as the dollar gained and 10-year U.S. Treasury yields rose 3.7 basis points to 1.65%. An index that tracks the dollar against six major currencies was up 0.3% at 98.43.
The euro's attempt to rally after Thursday's stronger-than-expected purchasing managers' data for August fizzled out, with analysts pointing to weakness in the forward-looking components of the surveys.
The PMIs would keep up pressure on the European Central Bank to deliver more stimulus because "surveys remain consistent with weak growth continuing in the third quarter," said Lee Hardman, currency analyst at MUFG.
Elsewhere, China's offshore yuan stabilized at 7.0920 after dropping to an 11-day low of 7.1072 overnight as the People’s Bank of China lowered its official yuan midpoint to an 11-year low. The move was limited even though the set rate was nowhere near the lows traders expected.
The pound gave back some of the gains made on Thursday after German Chancellor Angela Merkel said Britain had time until Oct. 31 to come up with a solution to the Irish border problem. It fell 0.4% to $1.2208. Against the euro, it fell 0.2% at 90.58 pence.
Analysts attributed the sterling gains to extreme short positions on the currency, which would prompt some traders to unwind those shorts at the merest hint of positive news. (Reuters)