The greenback dipped in Asian trading on Tuesday local time following a strong rally the day before as investors waited for March's U.S. consumer price index.
The U.S. dollar index, DXY, slid by 0.16 percent to 102.31 after gaining 0.39 percent at the beginning of this week. The index, which tracks the dollar's performance against six major peer currencies, hit a two-month low of 101.40 last week.
Sterling rose by 0.2 percent to $1.24085 after an overnight decline of 0.23 percent. The euro gained 0.26 over the greenback to $1.08885 following a 0.34 percent decline the day before.
The dollar also weakened by 0.21 percent to 133.31 yen after previously rallying 1.1 percent against the Japanese currency. Selling pressure on the yen eased as the 10-year Treasury yield fell in Tokyo trading after a two-day rally. The yen historically moves along with U.S. Treasury yields, said analysts.
Analysts also explained that the yen's decline at the beginning of the Asian trading week was caused by the rising expectation that the Bank of Japan (BoJ) would maintain its ultra-dovish monetary policy. The new BoJ governor, Kazuo Ueda, had said he would stick with the low benchmark rate implemented by his predecessor.
"It is highly likely that the U.S. economy will slow down in the second half of this year, leading to lower long-term interest rates over there, and if the BOJ does something to push up long-term interest rates here, that could strengthen the yen, undoing recent positive developments in Japan," Ueda said.
Sumitomo Mitsui Asset Management chief macro strategist Masayuko Kichikawa predicted that Ueda would "try to be behind the curve" and increase inflation expectations "a little further" by maintaining the exchange rate stability.
Meanwhile, the Australian dollar strengthened by 0.46 percent to $0.66725, regaining its previous losses as the country reached an agreement with China to end a trading dispute over Australian barley.
The financial market is anticipating the Federal Reserve's policy direction, which largely depends on economic data, said analysts. The U.S. government will publish the consumer price data on April 12. Economists predict that the data will indicate slowing price growth but at a level that is still well above the Fed's two percent target.
Last week, the Department of Labor released the non-farm job report, showing that the country added 236,000 payrolls in March or in line with the earlier estimates of 238,000. Analysts said the data indicated that hiring in the non-farm sector had eased last month.
U.S. banks will report their quarterly earnings in the coming days, which analysts said would indicate the banking system's health after the recent crisis. Rabobank head of FX strategy Jane Foley said bank earnings usually did not affect the forex market in the past. However, given the recent turmoil, the market will likely be impacted this time.
Fed may still hike rates
There is still a possibility that the Fed will hike interest rates again, said analysts. Commonwealth Bank of Australia strategists published a client note saying that the financial market had been "too pessimistic" about the U.S. economy since the recent banking crisis in the country.
"Strong underlying CPI is likely to be the catalyst for a change in market pricing for May, and delay pricing for the start of rate cuts."
Strategists at Commonwealth Bank of Australia.
Last week, the market predicted a 50-50 chance that the Fed would pause interest rate hikes as soon as May because its hawkish monetary policy exacerbated the banking crisis. It also expected that the Fed would begin cutting rates starting September.
Analysts predicted a strong CPI could prompt the Fed to hike the interest rate in the next policy meeting. In that case, the strategists forecast the dollar to trade over its 100-day moving average at 103.91 following the CPI report.