Euro strengthens against dollar amidst dovish Fed comments and anticipated Chinese stimulus

On Wednesday, the euro appreciated against the U.S. dollar, influenced by a decrease in Treasury yields following dovish comments from Federal Reserve officials and anticipated Chinese stimulus measures. Atlanta Federal Reserve President Raphael Bostic, speaking at the American Bankers Association, expressed that no further interest rate hikes were necessary. This statement led to a slide in the dollar index, with Bostic arguing that the current restrictive Fed policy was sufficient. Despite economic deceleration due to rate hikes, he does not predict a recession. As a result of these sentiments, the euro rose 0.25%, while the dollar index experienced a minor decline of about 0.05%.

Traders are keenly awaiting Wednesday's release of minutes from the last Fed policy meeting and key U.S. inflation data due on Thursday. Additionally, China's potential issuance of an additional 1 trillion yuan ($137.1 billion) in sovereign debt to stimulate its economy is seen as beneficial for the euro.

The previous day, Tuesday's late trading also witnessed a decrease in U.S. dollar value following dovish comments from both Bostic and Fed Governor Christopher Waller at the same convention. Their statements resulted in a decline in Treasury yields, especially the 10-year Treasury yield which saw its largest single-day fall in almost seven months. Consequently, the dollar index dropped by 0.24 percent to 105.8270.

Both Bostic and Waller emphasized the Federal Reserve's commitment to achieving a 2% inflation target, although Waller did not comment on possible interest rate hikes. Traders, using CME's FedWatch tool, anticipate steady interest rates in November and December. The cumulative effect of these events led to an appreciation of both the euro and British pound against the U.S. dollar and a depreciation of the greenback against the Swiss franc.

Various factors such as the Israel-Hamas conflict, Columbus Day holiday, Bank of Japan's inflation forecast, reports from the Kyodo news agency, performance of safe-haven assets, and Asian and European stock performance all contributed to shaping global currency trends. Scotiabank's Shaun Osborne suggested that term yields could limit the dollar's progress.

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