The dollar strengthened on Wednesday due to increasing expectations that the Federal Reserve will delay cutting rates until later this year, ahead of critical inflation reports. Meanwhile, the yen weakened to its lowest point in four weeks.
The rise in Treasury yields also bolstered the dollar, following a tepid response to the auction of two-year and five-year notes, which cast doubts on the demand for U.S. government debt.
The euro dropped 0.09% to $1.0848 but is on track for a 1.7% gain for the month, marking its first monthly increase in 2024. Sterling was last at $1.27525, aiming for a 2% gain in May.
U.S. consumer confidence data released on Tuesday unexpectedly showed improvement in May after three consecutive months of decline. However, inflation concerns persisted, and many households anticipated higher interest rates over the next year.
This mixed data comes as markets weigh the Fed’s next move, with traders now pricing in 34 basis points of rate cuts this year, compared to 150 basis points of easing expected at the start of 2024. A rate cut in September is currently priced in at 44%, according to the CME FedWatch tool. Persistent inflation and some weak spots in the economy, despite a strong labor market, continue to influence expectations for U.S. rates.
This week’s market focus includes several inflation reports, with German inflation data expected on Wednesday and the eurozone’s data on Friday. The key event will be the release of the U.S. core personal consumption expenditures (PCE) price index on Friday, the Federal Reserve’s preferred measure of inflation. Expectations are for it to remain steady on a monthly basis.
The dollar index, which measures the currency against a basket of others, was relatively unchanged at 104.7, slightly above the near two-week low of 104.33 reached on Tuesday. The index has declined 1.5% in May.
“FX markets continue to mark time in anticipation of core PCE data later this week,” said Christopher Wong, currency strategist at OCBC. “We should continue to see 104-105 holding up until the next catalyst comes along.”
The Australian dollar remained stable at $0.66485 after Australian consumer price inflation unexpectedly rose to a five-month high in April, raising concerns that the next move in interest rates might be an increase.
“Australia’s faster-than-expected April inflation again raises concerns about the final stretch of the global inflation path after several months of disinflation,” said Charu Chanana, head of currency strategy at Saxo in Singapore.
The yen reached a four-week low of 157.41 per dollar early on Wednesday, inching back towards levels that prompted suspected interventions from Tokyo at the end of April and early May. It last traded at 157.255.
The yen hit a 34-year low of 160.245 per dollar on April 29, leading to at least two suspected interventions that week, with Japanese authorities estimated to have spent more than 9 trillion yen ($57.21 billion) to support the currency.
“Perhaps Japanese officials will issue verbal warnings again, but without tangible action, it’s likely the dollar/yen will move towards the levels seen in late April,” said Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities.
The yen also weakened against other currencies. The pound rose 0.13% to 200.68 yen, the strongest since August 2008, earlier in the session, while the euro touched a one-month high of 170.795 yen.
Bank of Japan board member Seiji Adachi suggested that the BOJ might raise interest rates if a sharp yen decline boosts inflation or alters public inflation expectations more than anticipated.
The yen, sensitive to Treasury yields, has fallen 10% against the dollar this year but may still achieve a monthly gain in May.
In Asian trading hours, the benchmark U.S. 10-year yield rose to 4.568%, its highest since May 3.
($1 = 157.3100 yen)
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