Dollar in demand as modest China rate cut hits sentiment

The U.S. dollar gained in early European trade Tuesday, with this safe haven in demand as a rate cut by China’s central bank failed to assuage investor concerns over slowing economic growth.

At 01:55 ET (05:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher to 102.118, rebounding from its recent one-month low.

China’s central bank, the People’s Bank of China, cut its benchmark loan prime rate by 10 basis points earlier Tuesday, a move that had been widely telegraphed as Beijing struggles to shore up a slowing economic recovery.

However, this size of the rate decrease disappointed some who fretted that this would not be enough to shore up confidence, with the Chinese property sector particularly hard hit.

USD/CNY rose 0.2% to 7.1769, with the yuan trading just shy of its lowest level since late November, with traders looking for a wider stimulus package from Chinese authorities but receiving a lack of concrete measures from a cabinet meeting on Friday.

The dollar is also receiving something of a boost Tuesday ahead of an upcoming testimony by Federal Reserve Chair Jerome Powell before Congress, starting on Wednesday.

The U.S. Federal Reserve paused its year-long rate-hiking cycle last week to assess its impact on inflation and the country’s economic outlook, but also hinted at the likelihood of further rate increases ahead.

Traders are looking at Powell’s testimony–to the House Financial Service Committee on Wednesday and the Senate Banking Committee on Thursday–for cues on U.S. monetary policy, amid caution over the possibility that he may signal a July rate increase is on the cards.

U.S. economic data due Tuesday include housing starts and building permits for May, while FOMC member James Bullard is also scheduled to speak.

Elsewhere, EUR/USD traded largely flat at 1.0922, remaining close to a one-month peak as ECB officials spar over the need for more interest rate hikes going forward to continue the battle against inflation.

The European Central Bank raised interest rates by 25 basis points on Thursday, to the highest level in 22 years, and largely penciled in another increase in borrowing costs in July.

The ECB’s chief economist Philip Lane stated on Monday that it was too soon to commit to another hike in September, but a number of his colleagues have already expressed the view that underlying inflation remains stubbornly high and more tightening is needed.

GBP/USD fell 0.1% to 1.2783, but remains near 14-month highs with traders fully expecting the Bank of England to raise its benchmark interest rate to 4.75% from 4.5% on Thursday, the highest rate since 2008.

Wednesday sees the release of the CPI number for May, and this is expected to confirm that inflation in the U.K. remains the highest in the G7, more than four times the central bank’s 2% medium-term target.

“While there is little doubt that the BOE will increase interest rates on Thursday, there will be lots of views on the size of the hike and the policy guidance for what follows — as standalone, and in combination,” Mohamed El-Erian, the chairman of Gramercy Funds, said in a tweet on Monday.

Elsewhere, the risk-sensitive AUD/USD fell 0.7% to 0.6803, while USD/JPY traded largely unchanged at 142.01.