SINGAPORE- The dollar edged lower on Wednesday as traders assessed the odds of a rate hike by the Federal Reserve next week, while the Aussie scaled a fresh three-week high in the wake of a rate increase and a decidedly hawkish stance by its central bank .
The Australian dollar peaked at $0.6690 in early Asia trade, its highest since mid-May, buoyed by lingering effects of the Reserve Bank of Australia’s (RBA) quarter-point interest rate increase to an 11-year high on Tuesday.
The decision and the RBA’s hawkish policy statement had sent the Aussie rising 0.8 percent in the previous session, with governor Philip Lowe warning of more tightening on the cards because inflation was still too high.
“The cash rate is now 4.1 percent, which we think is in a deeply restrictive territory, so that obviously means that the risk of a hard landing in the Australian economy has increased,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
In a speech on Wednesday, Lowe reiterated that some further tightening may still be required to bring inflation to heel, though that would depend on how the economy and inflation evolve.
In the broader currency market, the US dollar dipped in early Asia trade, as traders pared back their expectations of a rate hike at next week’s FOMC meeting.
Against the greenback, sterling rose 0.08 percent to $1.2432, while the kiwi gained 0.08 percent to $0.6084.
Money markets are pricing in a roughly 19 percent chance that the US central bank will raise rates by 25 basis points next week, compared to an over 60 percent chance a week ago, according to the CME FedWatch tool.
Data out last week showed that the US services sector barely grew in May as new orders slowed, pushing a measure of prices paid by businesses for inputs to a three-year low, a welcome sign for the Fed in its fight against inflation.
