LONDON -- The euro hit a seven-week low versus the dollar on Wednesday and investors looked to minutes from the Federal Reserve's last policy meeting as expectations of interest rate cuts in the U.S. continue to recede.
The yen pared earlier gains against the dollar but ticked higher against other major currencies after a 6.5 percent fall in Chinese stocks crimped risk appetite and put some pressure on carry trades, where investors borrow low-yielding currencies like the yen to buy higher-yielding assets.
The dip in Chinese stocks initially pushed the yen up across the board as investors scaled back short positions.
However, this move was reversed against the dollar as investors turned their focus to the Federal Open Market Committee's minutes.
Weaker-than-expected private sector U.S. job growth in May, as measured by the latest ADP Employment report, had little impact on currencies, suggesting investors aren't reading too much into that ahead of the non-farm payrolls report on Friday.
Story Continues Below
"We have to put forward risk that in the data in the next few days we will see a much larger move (in euro/dollar)," said Adrian Hughes, currency strategist at Societe Generale.
"If you look at all of the data we have we should be really 100 points lower. We will need awful a lot from the employment report for the Fed to budge from the current mantra on inflation."
At 1215 GMT the euro was down 0.2 percent at $1.3418, having earlier hit $1.3407, its lowest level since April 11.
The dollar was flat against the yen at 121.70, recouping its earlier mild losses, while the euro was still down 0.2 percent against the Japanese currency at 163.25 yen.
The yen was also up against sterling and the Australian and New Zealand dollars.
MINUTES IN FOCUS
The dollar has also drawn strength from weakness in global equity markets, according to analysts.
"The dollar has shown an increased tendency of late to benefit from stress in global equity markets, likely a reflection of the greater allocation of U.S. investors to overseas markets in recent years," said UBS in a client note.
"As such, to the extent this week's China news does damage equities globally, the dollar is likely to gain back a bit more ground."
Investors are also looking to the release of the FOMC minutes for signs the central bank might hold interest rates steady this year instead of cutting them — a factor supporting the dollar in recent weeks.
"The dollar is still rather well supported by a change we have seen in interest rate expectations," said Marcus Hettinger, global FX strategist at Credit Suisse in Zurich.
"The minutes will show they have flexibility but are concerned about inflation. We still think they will not cut interest rates."
Fed funds futures are now pricing in a less than 50-50 chance of the Fed cutting rates by a quarter percentage point this year. A month ago, that was fully discounted.
Euro zone data on Wednesday showed that money supply growth eased in April but stayed near 24-year highs, backing analysts' expectations the European Central Bank will keep raising rates.
M3 money supply growth slowed to 10.4 percent in April from 10.9 percent in March, the fastest growth since 1983.
Expectations for interest rate rises from the current level of 3.75 percent were also supported by comments from ECB Governing Council member Nicholas Garganas.
He told Bloomberg that all options are open on the pace and size of further interest rate rises and said he would not be surprised if euro zone economic growth in the first half of this year was stronger than expected.
© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.
Editor's note:
Why gold could skyrocket in 2007. Two best ways to cash in.
Cash in on dollar slide. Make 25 to 50% in six months.
Buffett, Soros, Templeton, Rogers: Learn Their Money-Making Secrets
