Kevin Buckland
TOKYO (Reuters) – The dollar hovered near a one-month peak against the euro and jumped to a one-week high against the yen on Tuesday as traders braced for major U.S. inflation data and fresh Federal Reserve interest rate forecasts the following day.
The US currency was supported by higher Treasury yields after unexpectedly strong domestic employment data late last week, prompting a sharp cut in bets that the Federal Reserve will cut rates this year.
The Bank of Japan will set policy on Friday, and while investors expect the central bank to cut monthly government bond purchases as early as this meeting, the wide difference in yields relative to the US is putting the yen on the defensive.
The dollar added 0.15% to 157.275 yen, after earlier hitting its highest since June 3 at 157.335.
The euro was unchanged at $1.076825. The price fell to $1.0733 on Monday, a level last seen on May 9, after far-right gains in European Parliament elections prompted French President Emmanuel Macron to call early elections.
Sterling GBP=D3> remained steady at $1.27355 ahead of labor data later in the day, which is forecast to show a slowing decline in UK employment.
The index, which measures the currency against the euro, pound, yen and three other major currencies, was little changed at 105.12 after hitting 105.39 on Monday for the first time since May 14.
Economists polled by Reuters expect headline U.S. consumer price inflation to fall to 0.1% from 0.3% last month and core price pressures to remain stable for the month at 0.3%.
No policy changes are expected at the end of the Fed’s two-day meeting ending Wednesday, but officials will update their economic and interest rate forecasts.
“Expect the Fed to remain cautious, emphasizing its dependence on data and the need to see more evidence that the disinflationary trend is sustainable to give them confidence in moving forward with rate cuts,” said Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions.
“As always, the data is in the driver’s seat.”
Officials have become more hawkish since the last such announcement in March, when the average forecast called for a three-quarter point contraction this year. Markets are currently forecasting a contraction of only 37 basis points by December.
In contrast, many analysts and investors expect the Bank of Japan to cut bond purchases by 1 trillion yen ($6.4 billion) to about 5 trillion yen a month following media reports hinting at such a change from Reuters and other outlets.
“The danger for the BOJ is a ‘buy the rumor, sell the fact’ reaction that would catapult the dollar through technical resistance at 157.70 yen,” said Tony Sycamore, market analyst at IG.
The Bank of Japan and the government are united in efforts to limit the yen’s weakness and avoid derailing a desired cycle of moderate inflation and sustained wage increases.
The currency’s fall to a 34-year low of 160.245 per dollar in late April triggered several rounds of official Japanese intervention totaling 9.79 trillion yen.
($1 = 157.1400 yen)