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    Tuesday, May 14, 2024

    Dollar Drifts as Traders Await US Inflation Data; Frail Yen in Focus

    The dollar was steady on Tuesday as investors awaited the crucial inflation report this week that will likely shape the U.S. rates outlook, while the yen was hovering near a two-week low, stoking intervention worries.

    The currency market has been sedate this week, with investors seeking to gauge what path the Federal Reserve will take this year in the wake of recent softer-than-expected U.S. labour market data and comments from officials that indicated the U.S. central bank was unlikely to raise rates further.

    Investors have had to dial back their expectations of rate cuts this year due to sticky inflation and are now pricing in 42 basis points of easing this year, compared with 150 bps of easing anticipated at the start of 2024.

    They are also pricing in a 60% chance of a cut in September, versus 75% a month earlier, according to CME FedWatch tool.

    All eyes this week will be on the consumer price index (CPI)on Wednesday which is expected to show that core consumer prices rose 0.3% month-on-month in April, down from 0.4% growth the prior month, according to a Reuters poll.

    But before that, U.S. Producer Price Index (PPI) is due to be released later on Tuesday, which analysts will parse through to get a sense of whether inflation is heading towards the Fed's target of 2%.

    "A softer CPI, coming on the heels of a weaker payrolls report, will reignite market expectations of a July rate cut, weighing on the dollar," said Nicholas Chia, Asia macro strategist at Standard Chartered

    The euro eased a bit to $1.0786 but is up 1% against the dollar so far this month, while sterling last bought $1.2559, up roughly 0.5% so far in May.

    The dollar index , which measures the U.S. currency against six rivals, was last at 105.27. The index has slipped about 1% in the month.

    Nearly two-thirds of economists expect the Fed to cut its key interest rate twice this year, starting in September, a Reuters poll showed. That's up from a just over half of economists in the previous survey.

    With no rate cuts possible until July and not likely until September, and the next earnings season two months away, there are no apparent catalysts to change the near-term direction of markets other than inflation and economic data, said Vasu Menon, managing director of investment strategy at OCBC.

    U.S. retail sales will also be reported on Wednesday and industrial production data on Thursday.

    "Any signs that the U.S. economy is cooling should be positive for global markets because it also means a benign outlook for U.S. inflation and interest rates," Menon said.


    Traders are back on tenterhooks as the yen nears levels that saw suspected interventions by Tokyo. It was last at 156.41 per U.S. dollar, having touched a two-week low of 156.50 earlier in the session.

    Japan's Ministry of Finance is suspected to have intervened in the currency market at the end of April through early May after the yen hit a 34-year low of 160.245 on April 29.

    But the market remains bearish on the currency given the massive gap between Japan's ultra-low yields and those in other major economies.

    Japan's Finance Minister Shunichi Suzuki said on Tuesday the government will closely work with the Bank of Japan on the foreign exchange to ensure there is no friction between their mutual policy objectives.

    "We'll take all possible measures to closely monitor the currency," Suzuki said, adding it is important for the exchange rate to move in a stable manner reflecting fundamentals, rather than focusing on its level.

    The yen was briefly supported on Monday when the Bank of Japan sent a hawkish signal by cutting its offer amount for a segment of Japanese government bonds.

    In other currencies, the Australian dollar was 0.11% lower at $0.6601, while the New Zealand dollar was flat at $0.6016. Reuters 

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