By Peter Nurse

Investing.com — The dollar edged higher in early European trade Wednesday, climbing from a near five-month low, as traders digest the latest strong U.S. manufacturing data with regard to a potential prompt normalization of Federal Reserve monetary policy.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 89.935, after dipping as low as 89.662 on Tuesday, approaching the lowest since Jan. 7 at 89.533.

EUR/USD traded largely flat at 1.2216, not far from a near five-month high of 1.2266 touched last week, USD/JPY rose 0.2% to 109.67, GBP/USD rose 0.1% to 1.4153, after easing off a three-year high of 1.4250 reached Tuesday, and USD/CAD was largely flat at 1.2067 after falling to a fresh six-year low of 1.2007 overnight.

On Tuesday, the Institute for Supply Management said its index of U.S. manufacturing activity rose in May as pent-up demand amid a reopening economy boosted orders. The ISM's index of national factory activity increased to a reading of 61.2 last month from 60.7 in April, above the 60.9 forecast.

A strong reading on the whole, adding to the general impression that the U.S. economy is rebounding strongly, which could push the Federal Reserve to normalize monetary policy more quickly than current guidance would suggest.

Especially with the ISM survey's measure of prices paid by manufacturers hovering near levels last seen in July 2008, when the economy was in the throes of the Great Recession.

“We suspect that for every inflation number the Fed will get slightly more worried about the transitory call,” said analysts at Nordea, in a note. “We still believe that tapering will happen later in 2021 and that the dot plot will see more dots for rate hikes in 2022.”

However, the ISM’s measure of factory employment dropped to a six-month low, something that could well hold the Fed’s hand ahead of Friday’s official jobs report for May, particularly after April's much-weaker-than-expected reading.

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Elsewhere, AUD/USD was down 0.1% at 0.7748, after Australia’s economy expanded faster than forecast in the first three months of the year, as gross domestic product advanced 1.8% from the final quarter of 2020.

USD/CNY rose 0.1% to 6.3829, climbing from the three-year low of 6.3526 reached on Monday as policy makers took steps to cool its advance including raising banks' FX reserve requirements.

USD/TRY rose 1.1% to 8.6208, with the Turkish lira falling to fresh record lows after President Recep Tayyip Erdogan renewed calls for lower interest rates, continuing to expound his unorthodox belief that lower borrowing costs will help slow inflation.

This will increase the pressure on central bank Governor Sahap Kavcioglu, who was recently installed after Erdogan dismissed the previous governor for tightening policy too much.

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