Dollar wavering with inflation looming as next test for rates

The yen hit a one-month high and the dollar was held below recent peaks on Tuesday as traders awaited inflation figures due in the U.S. and China to guide the interest rate outlook, while momentum carried bitcoin to a fresh record high.

The data due on Wednesday is expected to show U.S. consumer prices galloped and Chinese factory gate prices soared in October. But it also comes as commodity prices have eased from peaks and central bankers have dampened speculation that they will raise interest rates imminently.

The firmer yen, which rose about 0.4% to 112.80 per dollar, and the fall in 20-year and 30-year U.S. Treasury yields to seven-week lows suggested investors are pricing in a pretty modest hiking cycle and slower economic growth in the longer term.

The euro, which had dropped to a 15-month trough of $1.15135 last week, firmed 0.2% to $1.1606.

The U.S. dollar index slipped 0.2% to 93.878, about the middle of the range it kept through October.

Fed funds futures have pushed back the likely date for rates lift-off from around July next year to September or October.

Analysts at Standard Chartered expect the Fed to raise rates slowly after making its first hike in the third quarter of next year.

“We expect the Fed to emphasise the fact that the U.S. economy is approaching inflation and maximum employment targets, rather than expressing concern about elevated inflation,” strategists Steve Englander and John Davies said in a note.

“The message likely will be a gradual pace of further rates hikes rather than an abrupt move.”

Last week, the Bank of England surprised investors by holding rates, while the Reserve Bank of Australia and the Federal Reserve dampened market expectations that they would hike rates aggressively.

Sterling, hammered last week in the wake of the BoE surpise, extended its recovery and was last at $1.3580 after falling as low as $1.3425 on Friday.

By contrast, the kiwi, having jumped on Monday, was steadied around $0.7164, drawing support from traders wary of the possibility that the Reserve Bank of New Zealand could raise rates by as much as 50 basis points (bps) later this month.

“If the RBNZ is of a mind to hike by 50bps, now’s the time,” ANZ analysts said in a note.

“That still seems incongruous with the uncertain global backdrop and cautious tone of other central banks. Still, until we know the outcome, markets will price in the risk.”

The risk-sensitive Australian dollar held onto to most of its gains made overnight to trade at $0.7422 on Tuesday.

Bitcoin, which is sometimes seen as an inflation hedge and has been surging on a wave of positive news, rose to a record $68,564 in Asia trade, pulling ether with it to a record $4,800.

Ahead of the inflation data, a slew of central bankers are due to speak later on Tuesday, including European Central Bank President Christine Lagarde at 1300 GMT and Fed chair Jerome Powell at 1400 GMT.


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