The dollar dipped to a one-month low versus the euro on Wednesday amid lower Treasury yields as traders braced for a key U.S. inflation report later in the day that could dictate the path of Federal Reserve policy.
However, the yen hovered close to a two-week low as a still-gaping yield gap between local bonds and U.S. peers continued to encourage selling of the Japanese currency.
The euro edged up 0.03% to $1.0823 in Asian trading hours, and earlier rose to $1.0828 for the first time since April 10.
The #USA_dollar index – which measures the currency against six top rivals, but is heavily weighted towards the euro – eased 0.11% to 104.94, after dipping to a 1-1/2-week low of 104.92 earlier.
The benchmark long-term U.S. Treasury yield edged down to 4.4414%, extending a 3-1/2-basis point (bp) retreat overnight.
Wednesday’s report on core consumer prices is expected to show CPI rose 0.3% month-on-month in April, down from a 0.4% growth the previous month, according to a #Reuters poll.
“The market is going to sink or swim together,” Deutsche Bank strategist Alan Ruskin wrote in a note, pointing out the “extremely rare” concentration of analysts’ forecasts at 0.3%.
He noted that rate path expectations are “a little more sticky than usual” and would require more than a single modest upside or downside surprise to swing markets considerably.
However, in the event of “a large upside miss” of 0.5% or more, “early thoughts of the next move possibly being a hike would create a very large scale repricing of rates and a major USD surge against all currencies,” he said.
#Fed Chair Jerome Powell gave a bullish assessment on Tuesday of where the U.S. economy stands, with an outlook for continued above-trend growth and confidence in falling inflation that, while eroded by recent data, remains largely intact.
Higher-than-expected consumer #prices in the first quarter of the year were the driving force for a sharp repricing of the pace of Fed rate cuts, with those bets now pared back to about 45 bps of reductions this year.
#Despite broad dollar weakness overnight against the majority of its #peers, it continued to climb against the #yen. The dollar edged back 0.12% to 156.245 yen on Wednesday, but had pushed as high as 156.80 overnight.
In contrast to U.S. counterparts, #Japanese long-term yields stand at just 0.955%, even with Bank of #Japan rhetoric turning more hawkish in recent days and prospects for another rate hike in June increasing.
The #dollar’s surge to a 34-year peak of 160.245 yen on April 29 triggered two rounds of aggressive #yen buying that traders and #analysts suspect was the work of the #BOJ and Japanese finance ministry.
“The #BOJ will hope that tonight’s U.S. CPI release is in line with expectations to avoid the need for a difficult conversation tomorrow about when the appropriate time is to #commence a third round of intervention – mindful that the past two rounds have yet to turn around the yen’s fortunes,” Tony Sycamore, an analyst at IG, wrote in a client note.
Elsewhere, the yuan bounced back from a two-week low versus the #dollar as a report of a possible plan to ease the country’s housing glut boosted sentiment, outweighing U.S. President Joe Biden’s decision to impose steep tariff increases on an array of #Chinese goods.
The #dollar dropped 0.24% to 7.2232 yuan in offshore #trading, after reaching the highest since May 1 at 7.2460 overnight.
Antipodean currencies also #benefitted from the China optimism, with the Australian dollar gaining 0.32% to $0.6648 after earlier reaching $0.6651 for the first time since March 8.
The #New_Zealand dollar climbed 0.37% to $0.6062, and earlier touched $0.6064 for the first time since April 10.
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