The U.S. dollar rebounded against the euro and yen on Tuesday after traders took profits from gains in those currencies and favored the greenback on expectations that the Federal Reserve could take a hawkish bias in a policy statement on Wednesday.
Traders said anticipation that the central bank could reinforce expectations for a September rate hike helped boost the dollar after the biggest dive in Chinese equity markets in eight years had weighed on the greenback in the previous session. The dollar hit a two-week low against the euro and a nearly two-week trough against the yen Monday.
“Anybody who bought euros amid the 1 percent rally yesterday is likely to take some money off the table ahead of tomorrow’s event risk,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. Fed rate hikes are expected to boost the dollar by driving investment flows into the United States. Shanghai shares closed 1.7 percent lower on Tuesday after plunging 8.5 percent on Monday. The plunge had led some traders to buy the safe-haven yen and close short bets against the euro, which in turn sent the currency higher.
Tuesday’s less dramatic move in Chinese shares allowed the dollar to regain some ground. The dollar hit its highest level against the Swiss franc in over three months of 0.96740 franc early in the session. “It’s going to be all about looking for signs for the timing of a rate hike,” said Alfonso Esparza, senior currency Strategist at Oanda in Toronto, said in reference to the upcoming Fed statement.
Data showing U.S. consumer confidence weakened in July to its lowest level since September 2014, however, led the greenback to pare some gains. The euro was last down 0.37 percent against the dollar at $1.10465, after hitting a two-week high of $1.11295 on Monday . The dollar was up 0.29 percent against the yen at 123.600 yen after hitting a nearly two-week low of 123.010 yen on Monday. The dollar was last up 0.26 percent against the franc at 0.96490 franc.