Dollar pauses for breath as market braces for US inflation, Fed test

BY Reuters | ECONOMIC | 06/12/24 04:17 AM EDT

(Updates at 0803 GMT)

By Samuel Indyk and Brigid Riley

LONDON, June 12 (Reuters) - The dollar steadied on Wednesday after hitting a four-week high against peer currencies the day before as market players awaited key U.S. inflation data and the Federal Reserve's policy decision and updated economic projections later in the day.

The U.S. dollar has rebounded after Friday's stronger-than-expected jobs report raised the prospect of inflation remaining sticky while growth stays strong, making the U.S. central bank less likely to cut rates in the coming months.

Investors will have a chance to assess the inflation situation when U.S. Consumer Price Index numbers are released at 1230 GMT, just hours before the Fed concludes its two-day policy meeting.

Economists polled by Reuters expect headline inflation to have risen 0.1% in May, a slower pace than the 0.3% rise the month before. Core inflation is expected to have risen 0.3% in May from April.

The Fed is widely seen holding rates at 5.25%-5.5%, putting the focus on policymakers' updated economic projections known as the "dot plot" and Chair Jerome Powell's news conference for clues regarding the timing and pace of cuts.

"Consensus seems to be that the number of cuts in 2024 will be downgraded from three currently to two" in the latest dot plot, said Kieran Williams, head of Asia FX at InTouch Capital Markets.

Powell is likely to strike a relatively dovish tone, however, given disappointing growth indicators since the last Fed meeting, Williams said.

The dollar index, which measures the greenback against a handful of major peers, steadied at 105.26, after touching its strongest level since May 14 at 105.46 on Tuesday.

"At the last four meetings the dollar has ended lower on the day, largely because Powell has sounded dovish during the press conference," said ING's global head of markets Chris Turner.

"I could see a repeat of that today. He's got a little more ammunition to be dovish today," Turner added, citing an easing in some activity data, a rise in the unemployment rate and inflation coming closer to target.

The euro was little changed at $1.0743 after a recent slide took the single currency to an almost six-week low of $1.07195 on Tuesday.

The currency has been under pressure after far-right parties gained ground in European Parliament elections, prompting French President Emmanuel Macron to call a snap election, to be held in two rounds on June 30 and July 7.

Polls have Marine Le Pen's far-right National Rally as the most popular party but will likely fall short of an outright majority.

Uncertainty around the election is denting the appeal of the euro, ING's Turner said.

"I think it's going to be a long June," Turner said.

"For today, should the U.S. data or Powell come in on the dovish side, I don't think euro-dollar will be the best vehicle to play the weaker dollar," he added.

Sterling was a touch higher at $1.27485 despite Britain's economy showing no growth in April in a blow for Prime Minister Rishi Sunak before July's general election.


The Bank of Japan also meets this week, where it is widely expected to keep interest rates steady and consider whether to offer clearer guidance on how it plans to reduce its huge balance sheet.

"The BOJ will have to walk a tightrope in its policy meeting this week to avoid inadvertently stoking JPY outflows, while also supporting growth and preventing disorderly JGB markets," said Wei Liang Chang, currency and credit strategist at DBS.

The yen was pinned at 157.27 per dollar, just off the one-week high of 157.40 touched the previous day.

Although Japan's central bank will likely discuss bond buying cuts to preempt yen selling pressure, Wednesday's U.S. CPI and Fed meeting will be crucial in determining dollar/yen volatility this week, Chang added.

"The hurdle for another upside surprise to U.S. rates and the USD looks quite high though, and we do not expect a retest of the 160 level in USD/JPY," Chang said.

The yen's decline to a 34-year low of 160.245 per dollar at the end of April triggered several rounds of official Japanese intervention totalling 9.79 trillion yen ($62.26 billion). ($1 = 157.2400 yen)

(Reporting by Brigid Riley and Samuel Indyk; Editing by Christopher Cushing, Gerry Doyle and Christina Fincher)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.