The dollar fell slightly on Thursday from near three-month highs, a day after a surprise rate hike from the Bank of Canada suggested the Federal Reserve may also have more work to do to combat inflation.

The euro was last up 0.3% at $1.073 against the dollar – the most traded currency pair in global markets.

That was despite data showing that the euro zone economy slipped into a mild recession in the first quarter, after gross domestic product statistics were revised.

The dollar index, which measures the currency against six major peers, was down 0.19% to 103.84. Last week the index hit 104.7, the highest since March 15.

A view among investors that the U.S. 2-year bond yield had potentially peaked was weighing on the dollar, said Simon Harvey, head of FX analysis at Monex Europe.

But, he added: “We must highlight that the moves we’re seeing today are marginal.”

Yields on the U.S. 2-year Treasury rose after the Bank of Canada decision and hit 4.592% on Thursday before slipping back to 4.565%. Bond yields are key drivers of currencies, with higher rates typically attracting investment.

The Bank of Canada surprised traders by raising interest rates to 4.75%, a 22-year high. It followed a rate hike by the Reserve Bank of Australia on Tuesday.

“The view here was that if both Australia and Canada felt the need for further hikes, in all probability the Fed would too,” Chris Turner, head of markets at ING, said in a note to clients.

Against Canada’s dollar, the U.S. dollar was down 0.19% at C$1.335, after falling 0.24% on Wednesday.

The Australian dollar was up 0.43% at $0.668, taking its monthly gains to roughly 2.7%. Sterling was 0.21% higher at $1.247.

The Canadian decision put the spotlight back on the Federal Reserve, which sets interest rates on Wednesday next week.

According to derivative market pricing, traders currently think there’s a 70% chance the Fed will hold rates steady next week, and a 30% chance of a 25 basis point (bp) increase. 

They think the Fed could then raise rates by 25 bps in July, after policymakers hinted at a so-called skip. That would boost the Fed funds rate to a range of 5.25% to 5%.

The European Central Bank sets rates on Thursday and traders broadly expect a 25 bp hike, to be followed by another 25 bp increase in July, taking rates to 3.75%.

In Asia, the dollar was down 0.29% against Japan’s yen at 139.71 yen per dollar, after rising 0.37% the previous day.

The onshore and offshore yuan eased to their weakest in six months against the dollar, further pressured by economic worries.

Data released on Wednesday showed China’s exports shrank much faster than expected in May while imports extended declines, raising doubts about the country’s fragile economic recovery.

Meanwhile, the Turkish lira slipped to a record low of 23.39 per dollar in early Asia trading. It remained under pressure, last at 23.36.

The yen will likely continue to drag its heels against the dollar, MUFG says, as the latest economic Japanese data showing weaker wage growth is expected to keep the Bank of Japan leaning dovish at the policy meeting next week.

USD/JPY was up 0.1% to 139.66.

Without a shift in BoJ policy to a less dovish stance, the yen is “more likely to continue trading at weak levels,” MUFG said following weaker-than-expected wage data overnight Tuesday.

Real wages in Japan dropped 3.0% from a year earlier in April, the labor ministry reported Tuesday, steeper than the 2.0% economists had expected and will “reinforce market expectations for the BoJ to maintain current loose policy settings at this month’s policy meeting on 16th June and for the rest of this year,” MUFG added.

The weakness in April was driven by a “drop in overtime earnings, which fell for the first time in more than two years, and subdued bonus payments growth,” Daiwa Capital Markets said in a note.

The yen’s breach of 140 against the greenback on Monday stoked talk that the central bank could intervene to prop up the currency following a similar move last year when the yen topped 150 against the dollar.

But the latest data is a setback for the BoJ, MUFG says, as the central bank was expecting that the recent round of agreements by labor unions and employers to hike wages would have been reflected in the data.

“The BoJ has been expecting around 40% of the wage negotiation results to have been reflected in April with the number rising to more than 80% by July,” according to MUFG.

The dollar edged lower on Wednesday as traders assessed the odds of a rate hike by the Federal Reserve next week, while the Aussie scaled a fresh three-week high in the wake of a rate increase and a decidedly hawkish stance by its central bank .

The Australian dollar peaked at $0.6690 in early Asia trade, its highest since mid-May, buoyed by lingering effects of the Reserve Bank of Australia’s (RBA) quarter-point interest rate increase to an 11-year high on Tuesday.

The decision and the RBA’s hawkish policy statement had sent the Aussie rising 0.8% in the previous session, with governor Philip Lowe warning of more tightening on the cards because inflation was still too high.

“The cash rate is now 4.1%, which we think is in a deeply restrictive territory, so that obviously means that the risk of a hard landing in the Australian economy has increased,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY).

In a speech on Wednesday, Lowe reiterated that some further tightening may still be required to bring inflation to heel, though that would depend on how the economy and inflation evolve.

In the broader currency market, the U.S. dollar dipped in early Asia trade, as traders pared back their expectations of a rate hike at next week’s FOMC meeting.

Against the greenback, sterling rose 0.08% to $1.2432, while the kiwi gained 0.08% to $0.6084.

Money markets are pricing in a roughly 19% chance that the U.S. central bank will raise rates by 25 basis points next week, compared to an over 60% chance a week ago, according to the CME FedWatch tool.

Data out last week showed that the U.S. services sector barely grew in May as new orders slowed, pushing a measure of prices paid by businesses for inputs to a three-year low, a welcome sign for the Fed in its fight against inflation.

“We don’t think the FOMC will hike next week … but risks again are skewed to the upside,” said Kong.

The U.S. dollar index slipped 0.03% to 104.05, while the euro rose 0.07% to $1.0698.

Euro zone consumers lowered their inflation expectations, a European Central Bank survey showed, a relief for policymakers after an unexpected surge a month earlier.

Against the Japanese yen, the greenback slipped 0.27% to 139.26.

Elsewhere, the Turkish lira slid nearly 2% to a fresh record low of 21.99 per U.S. dollar, while the Canadian dollar rose to a fresh one-month high of C$1.3388 to the greenback ahead of an interest rate decision later on Wednesday.

CRYPTO SHAKEOUT

In the cryptoverse, bitcoin, the world’s biggest cryptocurrency, was last marginally higher at $27,273, after jumping nearly 6% on Tuesday.

The U.S. Securities and Exchange Commission (SEC) on Tuesday sued Coinbase (NASDAQ:COIN), accusing the largest U.S. cryptocurrency platform of operating illegally because it failed to register as an exchange, a move which came just a day after the regulators sued Binance, the world’s largest cryptocurrency exchange, and its CEO Changpeng Zhao.

“Bitcoin is trading higher … on a flight to the quality end of crypto,” said Tony Sycamore, a market analyst at IG Markets.

Binance’s BNB token was up 0.45% at $283.13, having plunged 9.2% on Monday.