Anticipation of US Inflation Report Weakens Dollar

15 May 2024 , 08:38 AM

With lower Treasury yields, the dollar was trading close to a one-month low against the euro on Wednesday as investors anticipated a significant U.S. inflation report later in the day that may determine the direction of Federal Reserve policy.

The yen was trading close to a two-week low as selling of the Japanese currency was encouraged by the persistent yield differential between local and U.S. Treasuries.

As tensions with Beijing increased, U.S. President Joe Biden announced significant duty rises on a range of Chinese imports, including computer chips, sending the yuan down to a two-week low against the dollar.

Early Asian trade saw the euro fall 0.04% to $1.0814, although it was still near the previous day’s high of $1.09255, which was last touched on April 10.

The U.S. dollar index, which rates the dollar against six major competitors but is disproportionately skewed towards the euro, was unchanged at 105.04 on Tuesday following a decline to a one and a half-week low of 104.95 on Tuesday.

The benchmark long-term U.S. Treasury yield fell 3 1/2 basis points (bp) overnight and was barely changed at 4.4472%.

According to a Reuters survey, Wednesday’s report on core consumer prices is projected to reveal that CPI increased 0.3% month over month in April, which is a decrease from a 0.4% growth the previous month.

Fed Chair Jerome Powell delivered a positive assessment of the state of the US economy on Tuesday, predicting above-trend growth going forward and maintaining the confidence in declining inflation, despite recent data to the contrary.

The steep repricing of the pace of Fed rate cuts in response to higher-than-expected consumer prices in the first quarter of this year has now been reduced to roughly 45 basis points of reductions this year.

The dollar strengthened versus the yen overnight while experiencing widespread weakening against most of its peers. After rising as high as 156.80 yen overnight, the dollar gained 0.06% on Wednesday to close at 156.535 yen.

Japanese long-term rates are at only 0.96%, far lower than their U.S. equivalents, despite recent hawkish remarks from the Bank of Japan and growing expectations for another rate hike in June.

Two waves of aggressive yen purchasing followed the dollar’s surge to a 34-year high of 160.245 yen on April 29, which traders and analysts believe was orchestrated by the BOJ and Japanese finance ministry.

In offshore trading, the dollar was trading at 7.2409 yuan, having dropped overnight to its lowest level since May 1 at 7.2460.

Beijing swiftly threatened to retaliate when the Biden administration imposed sharp tariff increases on processors, electric car batteries, and medical equipment. The obstructive taxes were covered by Reuters last week.

In other news, on Wednesday the New Zealand dollar reached a height of more than one month at $0.6051, while the Australian dollar reached a one-week high of $0.6630.

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