Investing.com - The U.S. dollar slipped lower in early European trade Thursday as weak economic data raised expectations of interest rate cuts by the Federal Reserve, while sterling edged higher as the U.K. went to the polls.
At 04:20 ET (08:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 104.900, extending steep overnight declines.
Economic weakness hits dollar
The dollar retreated slightly Thursday, continuing Wednesday’s weakness, after the release of data showing softer-than-expected employment figures and a weak reading on non-manufacturing activity.
This data has increased expectations that a cooling U.S. economy will persuade Fed officials to sanction interest rate cuts in the near future.
The CME FedWatch tool showed traders pricing in a nearly 66% chance of a September rate cut, up from 59% seen a day ago.
Trading is likely to be range bound Thursday, given the U.S. is celebrating Independence Day, and a lot of attention will turn to Friday’s jobs report for further guidance.
French political uncertainty
The euro rose 0.1% to 1.0794, benefitting from the dollar weakness, although regional political uncertainty may hinder its gains.
The European Central Bank should not rush into its next interest rate cut, Slovenia's central bank governor Bostjan Vasle said on Wednesday, as a host of risks could still derail eurozone disinflation.
The euro has fallen more than 1% since French President Emmanuel Macron called for a surprise snap election on June 9, and it’s difficult to see it gaining substantially given the uncertainty ahead of Sunday's run-off election.
The pound rose 0.2% to 1.2759, with the U.K. going to the polls Thursday in a general election.
Yen on intervention watch
In Asia, the yen traded 0.3% lower to 161.21, after nearly crossing the 162 level on Wednesday.
The pair was still trading well above 160- the level that had last attracted government intervention in May. With Japanese officials reiterating their commitment to defend the yen, traders remained on guard over any potential intervention in the coming days.
The yuan remained largely unchanged at 7.2701, remaining close to seven-month highs amid waning confidence in the Chinese economy.
Analysis: The weakening U.S. dollar and potential interest rate cuts by the Fed could impact global financial markets. Investors may need to adjust their portfolios to account for potential currency fluctuations and market volatility. Additionally, political uncertainty in Europe and the UK, as well as intervention watch in Japan, could further contribute to market instability. It is important for investors to stay informed and consider diversifying their investments to mitigate risks during these uncertain times.