Dollar stuck ahead of key US inflation print

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LONDON — The dollar hid below recent highs on Tuesday as traders awaited key U.S. inflation figures this week for any sign that price pressures are finally easing and the need for further aggressive hikes US interest rates are easing.

Surprisingly strong U.S. jobs data on Friday had boosted the greenback, which posted its biggest daily percentage gain since mid-June against the yen on the day, as investors stepped up bets on a 75 basis point (bp) rate hike in September.

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But the currency has since retreated as the focus shifted to Wednesday’s consumer price index (CPI) in July.

The dollar index, which measures the value of the currency against a basket of other peers, was slightly lower at 106.23. It held below a more than a week high reached on Friday at 106.93.

The pound was little changed at around $1.2055 and the euro was 0.2% firmer at $1.0213. The dollar was also stable around 134.90 yen.

“I’m a bit worried about inflation tomorrow. The market has been on the wrong foot all year and if we get strong underlying inflation it will materialize expectations of a 75 basis point rate hike in September,” said Kenneth Broux, currencies at Societe Generale in London.

« It’s too early to say it’s time to short the dollar because the Fed may need to do more. »

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The US Federal Reserve raised rates by 75 basis points in June and July. Money market futures show traders are seeing about a two-thirds chance of a 75 basis point hike next month and have started to push expectations of a rate cut deeper into 2023.

Economists polled by Reuters see headline inflation year-on-year at 8.7% – staggeringly high, but lower than last month’s 9.1% figure. The Fed is targeting 2% inflation.

Last week’s strong jobs data fueled expectations of aggressive near-term increases, pushing short-term Treasury yields further above their long-term peers.

The spread between the yields of two- and 10-year Treasury bills, a reliable indicator of the recession, reached its highest level in two decades.

On Monday, a New York Fed survey showed consumer inflation expectations fell sharply in July, perhaps offering a glimmer of hope that the CPI release will provide relief.

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« The market is naturally waiting for the numbers to revalue, rather than pricing them in, » said Ray Attrill, head of currency strategy at National Australia Bank in Sydney.

The dollar’s safe-haven status, however, makes the greenback’s reaction a little harder to predict, especially as growth and geopolitical concerns swirl.

Australian consumer confidence fell for a ninth month in a row and the Australian and New Zealand dollars edged lower as London trade kicked off.

China has extended military drills near Taiwan, and the self-governing island’s foreign minister said China was using the drills launched to protest the visit of US House Speaker Nancy Pelosi. as an excuse to prepare for an invasion.

(Reporting by Dhara Ranasinghe; Additional reporting by Tom Westbrook in Singapore, Editing by Alex Richardson)