By Kevin Buckland and Canan Sevgili
TOKYO/LONDON (Reuters) -The U.S. dollar edged higher on Wednesday, rebounding from its lowest level in nearly a week, after Federal Reserve Chair Jerome Powell struck a cautious tone on further easing overnight, though markets still priced in two more rate cuts this year.
The euro, meanwhile, remained largely unchanged by data that showed German business morale fell unexpectedly in September, with Ifo’s business climate index dropping to 87.7 from 88.9 in August amid a weak economic outlook.
It was last down 0.4% at $1.177, but was relatively steady against other currencies, like the pound and the Swiss franc, highlighting investor buying of the dollar. Sterling declined 0.3% to $1.34820.
Key for markets now is the expectation of quarter-point rate cuts at the remaining two Fed meetings this year and another in the first quarter of 2026, in line with the central bank’s guidance after last week’s meeting.
This week’s U.S. data will be in focus, particularly Friday’s release of the personal consumption expenditures (PCE) price index, a key input for shaping expectations on the Fed’s next policy steps.
“We still see the balance of risks as skewed to the downside for the dollar into the core PCE release at the end of this week, with a 0.2% MoM print cementing expectations for two Fed cuts this year. That is, unless the geopolitical picture in Europe deteriorates,” said Francesco Pesole, FX strategist at ING.
He added that moves in the dollar were contained, given Powell essentially reiterated the cautious view he offered last week.
At that time, the dollar bounced back from its lowest level since early 2022 after the Fed’s policy announcement and Powell’s subsequent news conference, which fell short of the market’s more dovish expectations following a recent, sharp weakening of the labour market.
US DOLLAR INDEX ADDS 0.35%
The U.S. dollar index, which measures the currency against six major rivals, added 0.35% on Wednesday to trade at 97.575, attempting to claw back ground after two straight losing sessions in which it touch its lowest since Thursday at 97.198 overnight.
“Powell acknowledged the absence of risk-free policy options, warning that premature easing could entrench inflation whilst excessive monetary restriction might unnecessarily damage employment prospects,” said James Kniveton, senior corporate forex dealer at Convera.
Against the yen, the dollar added 0.29% to 148.065 yen.
Candidates for the next leader of Japan’s ruling Liberal Democratic Party answered journalists’ questions on Wednesday.
Frontrunner Sanae Takaichi, a fiscal and monetary dove, said monetary policy was up to the Bank of Japan but higher rates could affect mortgages and corporate investment.
Elsewhere, Australia’s dollar rose 0.23% to $0.66140, erasing an earlier small loss, after the consumer price index (CPI) climbed to 3% in August from 2.8% in July, slightly above the 2.9% median forecast and less than a week before the Reserve Bank’s next policy meeting.
However, the data picture was complicated by a key measure of core inflation easing back to 2.6%.
Traders slightly pared back bets for a rate cut by year-end to about 33%, according to LSEG data. Markets continue to expect no change to policy on September 30.
Data suggest sticky prices could hinder the RBA’s ability to deliver rate cuts to support a weak labour market, though the jump in headline inflation is largely due to expiring energy subsidies and may not be as bad as it looks, said Kyle Rodda, an analyst at Capital.com.
New Zealand’s dollar held steady at $0.5851 after the appointment of a new central bank chief.
New Zealand Finance Minister Nicola Willis on Wednesday announced that Swedish central banker Anna Breman has been appointed as the next Reserve Bank governor, becoming the first woman in the role. She takes over from December 1.
(Additional reporting by Kevin Buckland in Tokyo; Editing by Sam Holmes, Lincoln Feast, Amanda Cooper and Ed Osmond)
