Currencies: Dollar rally pauses as euro turns higher

A lack of major economic data and few clear drivers left currency markets on the quieter side on the Wednesday ahead of Thanksgiving, as major pairs retraced some of the previous day’s moves.

See: Which markets are closed on Thanksgiving?

The ICE U.S. Dollar Index

DXY, -0.11%

 was down 0.2% at 96.694. This followed Tuesday’s rally, which coincided with a sharp drop in equity markets. The Dow Jones Industrial Average

DJIA, +0.07%

 and SP 500

SPX, +0.38%

erased all their 2018 gains. But stocks and more risk-sensitive currencies had recovered somewhat by Wednesday.

Also check out: South African assets rally on risk appetite, but there are plenty of worries for their future

The dollar’s main rival, the euro

EURUSD, +0.1583%

was stronger, retracing some of its losses from the previous day and last buying $1.1393, versus $1.1370 late Tuesday in New York.

But the drivers for the shared eurozone currency are less clear, market participants said. The European Commission rejected Italy’s budget proposal for 2019 a second time on Tuesday and began disciplinary procedures against the European Union’s fourth largest — and the eurozone’s third largest — economy. Italy’s budget proposal sees spending and the deficit increase beyond a level deemed feasible by Brussels, leading to a spat over the past weeks that has weighed on investor sentiment.

Besides Italy, the European Union also criticized the budget proposals of Belgium, France, Portugal and Slovenia as possible noncompliant with the Stability and Growth Pact.

Conflicting headlines on Wednesday, including Italian officials saying, and then not saying, that the deficit increase could be up for discussion, left investors back at square one.

“So, participants in the euro-dollar pair are faced with a dilemma. On the one hand, the prospects of slower rate hikes from the Federal Reserve could weigh on the dollar. On the other hand, there is still no solid reason to be heavily bullish on the euro, given the situation in Italy and soft economic growth in the eurozone,” said Fawad Razaqzada, market analyst at Forex.com, who expects the euro to remain rangebound for now.

Trading in the British pound

GBPUSD, -0.0860%

ever suffering from the inconclusive drama surrounding Britain’s exit from the EU, was little changed Wednesday, with sterling buying $1.2777.

Another key date for Brexit looms with an EU summit scheduled on the coming weekend.

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Anneken Tappe is a markets reporter for MarketWatch. She is based in New York.

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