AtlantisFX | The US dollar rallied on Wednesday, retreating from its three-month low as markets lower their expectations of aggressive interest rate cuts by the Federal Reserve next month, but expectations of some monetary easing limit currency gains ,
Expectations of a half-percentage-point rate cut at the Fed's July meeting declined after St. Louis Fed President James Bullard said on Tuesday that such a move was "overblown."
Separately, Fed Chairman Jerome Powell said the central bank can "resist the short-term political pressure" and thus not be impressed by US President Donald Trump's demands for a substantial cut in interest rates.
The comments softened expectations of aggressive easing, but investors continue to expect a cut of a quarter of a percentage point next month.
U.S. Pat. Dollar Index, which represents the dollar against a basket of currencies, was trading at 95.75 on Wednesday until 02:44 ET (06:44 GMT), after the three-month low was formed on Tuesday at 95.36.
The dollar appreciated against the yen, but remained within range of the 5-month low, as heightened tensions between the US and Iran fueled demand for safe havens.
However, trade is likely to be subdued as the focus shifts to the meeting between Trump and Chinese President Xi Jinping, which is scheduled to take place at the G20 summit this weekend, but the expectations for a breakthrough over the dispute between the two largest Economies of the world would be low.
"The dollar's bullish trend is strong, especially against the yen," said Junichi Ishikawa, senior foreign exchange strategist at IG Securities.
"Powell is concerned about curbing inflated expectations, but Treasury yields are plummeting and US economic data is not looking good, and a rate cut in July is a done deal."
The US currency rose 0.2% to 107.38 yen, after falling to 106.79 on Tuesday, its lowest level since the Flash crash in early January.
The euro was barely changed against the dollar at 1.1356 and slightly edged back from the three-month high, which was formed at 1.141 on Tuesday.
The British pound had fallen 0.2% to 1.2669 before the Bank of England released its quarterly inflation forecast later Wednesday.
The BoE has said that interest rates should rise gradually as Britain avoids a no-deal exit from the European Union.
However, the pound remains plagued by fears that the Eurosceptic Boris Johnson will become the next British Prime Minister, increasing the chance of a Brexit without a deal.