Euro holds near five-year low ahead of ECB's Lagarde speech

The euro was flat on Tuesday, holding close to a five-year low against the U.S. dollar ahead of a speech from European Central Bank President Christine Lagarde.

The dollar fell just below a 20-year high against a basket of currencies before an expected Federal Reserve rate hike this week, with traders focused on the possibility of the U.S. central bank raising interest rates even more than expected.

While the Fed has taken an increasingly aggressive approach to monetary policy as it has tackled inflation soaring at its fastest pace in 40 years, the ECB has been more cautious.

Luis de Guindos, ECB Vice-President said in an interview published over the weekend by the central bank that its Governing Council hadn't discussed "any predetermined path for rate rises". He added that much will depend on macroeconomic data in June.

"After the dovish comments from de Guindos over the weekend, we will monitor Lagarde's latest comments today," said Jeremy Stretch, head of G10 FX strategy at CIBC.

Concerns about inflation, growth and energy insecurity as a result of sanctions imposed on Russia after its invasion of Ukraine have sent the euro around 15% lower against the dollar in three months.

Data showed German unemployment had fallen in April, though the war in Ukraine is slowing the continued recovery that has been seen with the lifting of pandemic measures.

The euro was flat at $1.05075 at 0855 GMT. It had dropped to $1.0470 on Thursday, its lowest since January 2017.

"We would not expect the data to provide any material support impact upon ECB rate expectations or the euro," Stretch said.

Traders expect the euro to remain under pressure against a strengthening U.S. dollar as the Fed is expected to raise interest rates by 50 basis points and announce plans to reduce its $9 trillion balance sheet when it concludes its two-day meeting on Wednesday.

Though the chances are seen as low, some investors are watching for the possibility of a 75-basis-point rise or a faster pace of balance sheet reduction than currently expected.

The dollar was also flat at 103.54 against a basket of currencies, after reaching 103.48 on Thursday, the highest since December 2002.

In past weeks, the U.S. dollar has also benefited from safe-haven flows as COVID-19 restrictions in China have triggered concerns about global growth.

The dollar reached 6.6880 against the Chinese yuan in offshore markets, its highest since November 2020.

The Japanese yen held just above 20-year lows against the dollar reached on Thursday, when the Bank of Japan strengthened its commitment to keep interest rates ultra-low by vowing to buy unlimited amounts of bonds daily to defend its yield target.

The Japanese currency was last at 130.10, after reaching 131.24 on Thursday, the weakest since April 2002.