Dollar remains stable in early trade as a test of US inflation approaches; PBOC backs the yuan

10 Aug 2023 , 10:01 AM

Investors expected important U.S. inflation data later on Thursday that may have an impact on the direction of Federal Reserve policy. The dollar maintained steady this week against a basket of significant peers, remaining close to the middle of its range.

Even though traders are largely betting that the Fed has stopped raising interest rates, the U.S. dollar nudged up to a one-month high against the yen as markets assumed that the Bank of Japan would take its time winding down stimulus.

The Australian and New Zealand dollars were trading around two-month lows as the economic prognosis for China, a major trading partner, grew more gloomy. The People’s Bank of China again set a firmer than anticipated official currency rate in response to recent losses, helping the yuan recover a little more from a one-month low.

The U.S. dollar index, which compares the value of the dollar to six other currencies, including the euro and the yen, was virtually unchanged at 102.50 in the early Asian morning this week.

Demand for safe haven assets has benefited the dollar in the wake of a string of dismal Chinese economic statistics, and the case for a soft landing for the American economy is still being made as price pressures ease.

Wall Street analysts predicted that the core consumer price index (CPI) would have increased 4.8% year over year in July, the same as in June.

The current odds on the money markets are 86.5% that the Fed will decide against another rate raise at its September meeting and instead anticipate a rate drop, most likely in the spring of 2019.

After drifting to its highest since July 7 at 143.90 yen, the dollar was barely changed at 143.79 yen.

Policymakers have emphasized that the BOJ’s move to loosen its control over long-term yields at the end of last month was only a technical adjustment meant to prolong the shelf life of stimulus, which is primarily represented by the negative short-term interest rate.

The euro was trading in an increasingly constrained $1.0930-$1.1042 range elsewhere, where it remained roughly flat at $1.09695 since last Friday.

In other markets, the Chinese yuan gained about 0.1% in offshore trading to 7.2235 per dollar as the PBOC again set a stronger official mid-point than the market consensus. On Tuesday, the offshore yuan fell to 7.2514, its lowest level since July 7.

Following a report, the day before that revealed a greater than anticipated decline in both imports and exports, data released on Wednesday revealed that the Chinese economy entered deflation last month.

An executive order banning some new U.S. investment in China in critical technologies like semiconductors was signed by U.S. President Joe Biden over the course of one night.

The Australian dollar, which has tended to closely track the yuan this week, was barely changed at $0.6530, off its bottom of $0.6497 on Tuesday, the lowest point since June 1.

The New Zealand dollar, known as the ‘kiwi,’ was unchanged at $0.6053, just above the day’s low of $0.6035, the lowest level since June 8.

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