Stefano Rebaudo and Ray V
(Reuters) – The dollar fell on Tuesday but remained in a tight range against its peers ahead of key inflation data from major economies this week that could weigh on the outlook for global interest rates.
The US dollar was also on the verge of its first monthly decline in 2024.
“The backdrop against which the Federal Reserve could begin cutting rates this year, even in December, is consistent with further dollar weakness,” said Athanasios Vamvakidis, global head of currency strategy at BofA, who cited some weaknesses in U.S. economic data and the recent strengthening expected indicators from the eurozone as the main drivers of the slowdown in the dollar exchange rate.
He also emphasized that the Fed opposed speculation about a possible rate hike, preventing further strengthening of the dollar.
Markets are now more than fully prepared for a US rate cut in December. They also don’t take into account the 80% chance of such a move in November and the 60% chance in September.
Against a basket of currencies, the dollar was down 0.11% at 104.44, down 1.7% on the month.
The euro rose 0.16% to $1.0876 despite some dovish comments from European Central Bank (ECB) policymakers on Monday and data showing German business morale stagnated in May.
ECB head Francois Villeroy de Gallo confirmed market expectations that, barring major surprises, the first rate cut next week is already a done deal. But investors recently updated their bets on future ECB action, pricing in less than a decline in each quarter in 2024 and early 2025.
German inflation data due on Wednesday, as well as eurozone data on Friday, will be watched for clues about how soon central bank easing could occur.
But all that data will be secondary to markets’ focus on Friday, when the US Core Consumer Expenditures (PCE) price index, the Federal Reserve’s preferred measure of inflation, is released. It is expected to remain stable on a monthly basis.
“The market has priced the favorable numbers well and they need to be delivered… for current Fed cut expectations for this year to be sustainable,” said Rodrigo Catril, senior currency strategist at National Australia Bank (OTC:).
“We think that any number that comes out as a surprise on the upside is going to cause a pretty strong reaction in terms of higher US bond yields and higher dollar.”
The yen hovered around 157 to the dollar and was last at 156.67 to the dollar.
“Such a scenario (of Fed rate cuts in 2024) would also correspond to a strengthening of the yen against the US dollar,” Vamvakidis told BofA.
However, if markets should depreciate the Fed, which “begins easing its policy in 2025, the yen could test the 160 level again and more intervention from the Japanese authorities would be likely,” he added.
All three of the Bank of Japan’s (BOJ) key core inflation measures fell below 2% in April for the first time since August 2022, data showed on Tuesday, adding to uncertainty about the timing of its next interest rate hike.
That comes ahead of Friday’s Tokyo inflation data, a leading indicator of the national performance.
Bank of Japan Governor Kazuo Ueda said on Monday the central bank would proceed cautiously with inflation targeting, noting that some issues had proven “exceptionally difficult” for Japan after years of ultra-loose monetary policy.
Sterling and the New Zealand dollar rose to more than two-month highs. They last bought $1.2783 and $0.6165 respectively.
The dollar rose 0.15%. On Wednesday, monthly data on the consumer price index in Australia will be published.
In cryptocurrencies, Bitcoin fell 2.6% to $67,778 and Ether fell 0.9% to $3,853.50.