Dollar Takes Breather Ahead Of U.S. Inflation Test

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The dollar edged off a two-week high on the euro, ahead of inflation data that should guide the Federal Reserve’s policy tightening path, and after the European Central Bank said it would start its rate-hike campaign next month.

U.S. core consumer price growth is expected to cool a fraction. In the nearer term, markets expect the Fed to announce the second of its three consecutive 50-basis-point interest rate hikes. This has boosted the dollar in recent months. Two-thirds of respondents to a Reuters poll of analysts expected a further 25 basis point hike in September. The euro edged up 0.23% in Asia trade having touched $1.0611 early in the session, its lowest since May 23. It lost 0.92% on the dollar overnight after a volatile ECB-driven session.

The dollar index , which measures the greenback against six peers, was 0.27% lower at 103.1 but still up 0.94%. The index “looks to have navigated a more determined and hawkish ECB with relative ease. Analysts said the index looked to be settling into a range of 101 to 105. CPI data and next week’s Fed meeting underscore the potential for higher U.S. yields.

The European Central Bank, said it would end quantitative easing on July 1. Then raise interest rates by 25 basis points on July 21. The ECB flagged a bigger rate increase in September unless the inflation outlook improves in the interim period. Elsewhere, the dollar gave back a fraction of its recent gains against the Japanese yen , falling 0.35% to 133.85 yen.

The Bank of Japan, unlike others, has committed to keep interest rates low, sending the yen down to 135.20 Jan 2002. A break past that would be its lowest since October 1998.
Lifers’ plans to reduce FX hedging is “marginally bearish” for the yen, said HSBC in a note on Friday, also lowering their dollar-yen forecast to 135 from the previous 128.
The risk sensitive Australian dollar edged up 0.35% to $0.7122 but was still down 1.2% this week, hurt by declines in equity markets, while sterling gained fractionally against the dollar to $1.2513.


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