SINGAPORE: The dollar waned on Tuesday following a slight pick up in risk appetite, but it held tight ranges against its peers ahead of key inflation data from major economies this week that markets are looking to for guidance on the global interest rate outlook.
Currency moves were largely subdued in early Asia hours after a quiet overnight session due to holidays in Britain and the United States, but the overall mood was positive with world shares firming.
The euro was a touch firmer at $1.0860 despite some dovish comments from European Central Bank (ECB) policymakers on Monday and data showing German business morale stagnated in May.
German inflation data due on Wednesday and the wider euro zone bloc’s reading on Friday will be watched for confirmation of an ECB rate cut expected next week, alongside clues on how soon subsequent easing from the central bank could come.
Dollar firm ahead of global inflation data
“The ECB is preparing itself for rate cuts next week, but the importance is what happens beyond that, and the lack of guidance from ECB speakers is telling in that sense,” said Rodrigo Catril, senior FX strategist at National Australia Bank (NAB).
“Obviously, the inflation dynamics will set the tone in terms of what to expect.”
Sterling held near an over two-month high and last bought $1.2774, while the New Zealand dollar inched up nearly 0.1% to peak at $0.6155, its strongest level since mid-March.
Down Under, the Aussie edged 0.03% higher to $0.6657, with the country’s monthly consumer price index data also due on Wednesday.
All of that data, however, will be a sideshow to the main focus for markets on Friday when US core personal consumption expenditures (PCE) price index report is released - the Federal Reserve’s preferred measure of inflation - where expectations are for it to hold steady on a monthly basis.
The outlook for US rates has been the dominant driver of currency moves over the past few years, and recent data from the world’s largest economy has blown hot and cold which has dented policymakers’ confidence on the pace and scale of rate cuts expected this year.
“The market is well priced for a benign number, and that needs to be delivered… for current Fed cut expectations for this year to be sustained,” said NAB’s Catril.
“Any number that surprises on the topside, we think, will provide quite a big reaction in terms of a move up in US yields and for the dollar to rip higher.”
Against a basket of currencies, the dollar dipped 0.01% to 104.55.
Elsewhere, the yen languished near the 157 per dollar level and last stood at 156.87 per dollar, though it was on track for its first monthly gain for 2024, helped by suspected intervention from Japanese authorities towards the end of April and start of May.
Tokyo inflation data, a leading indicator of nationwide figures, is similarly due on Friday, which could provide further clues on how soon subsequent rate hikes from the Bank of Japan (BOJ) could come.
BOJ Governor Kazuo Ueda said on Monday the central bank will proceed cautiously with inflation-targeting frameworks, noting that some challenges are “uniquely difficult” for Japan after years of ultra-easy monetary policy. In cryptocurrencies, bitcoin eased 0.47% to $69,255, while ether fell 0.2% to $3,882.20.
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