Stefano Rebaudo
(Reuters) – The dollar fell on Tuesday ahead of key U.S. and euro zone inflation data later this week that could weigh on expectations about the monetary policy outlook of major central banks.
The US dollar was also on the verge of its first monthly decline in 2024.
“The backdrop against which the Federal Reserve could start cutting rates this year, even in December, is consistent with further dollar weakness,” said Athanasios Vamvakidis, global head of currency strategy at BofA. He cited some weak US economic data and recent stronger-than-expected data from the eurozone as the main reasons for the dollar’s slowdown.
He also emphasized that the Fed opposed speculation about a possible rate hike, preventing further strengthening of the dollar.
Markets are now more than fully prepared for a US rate cut in December. They also don’t take into account the 80% chance of such a move in November and the 60% chance in September.
Against a basket of currencies, the dollar was down 0.20% at 104.44, down 1.84% on the month.
The euro rose 0.25% to $1.0885 despite some dovish comments from European Central Bank (ECB) policymakers on Monday and data showing stagnation in German business morale in May.
ECB head Francois Villeroy de Gallo confirmed market expectations that, barring major surprises, the first rate cut next week is already a done deal. But investors recently updated their bets on future ECB action, pricing in less than a decline in each quarter in 2024 and early 2025.
German inflation data due on Wednesday, as well as eurozone data on Friday, will be watched for clues about how soon central bank easing could occur.
But all that data will be secondary to markets’ focus on Friday, when the US Core Consumer Expenditures (PCE) price index, the Federal Reserve’s preferred measure of inflation, is released. It is expected to remain stable on a monthly basis.
Analysts scrambled to gauge the impact of the surprise rise in US numbers as they see the market has priced the favorable data well.
Derek Halpenny, head of EMEA global markets research at MUFG Bank, said markets could be more sensitive to stronger-than-expected data as debate intensifies over the Fed’s implied neutral policy stance.
Fed Governor Christopher Waller said last week that the key benchmark rate critical to monetary policy, the so-called R-Star, could rise after years of decline. R-star is a rate that neither stimulates nor restricts the economy while keeping inflation at the central bank’s target level.
“This increased debate over (the Fed’s) implied neutral policy could have an increasing impact on boosting market yields if the economy fails to slow,” Halpenny said.
The yen hovered around 157 to the dollar and was last at 156.80 to the dollar.
BofA’s Vamvakidis said the Fed’s first rate cut in 2024 “would also be consistent with a stronger yen against the US dollar.”
However, if markets should depreciate the Fed, which “begins easing its policy in 2025, the yen could test the 160 level again and more intervention from the Japanese authorities would be likely,” he added.
All three of the Bank of Japan’s (BOJ) key core inflation measures fell below 2% in April for the first time since August 2022, data showed on Tuesday, adding to uncertainty about the timing of its next interest rate hike.
That comes ahead of Friday’s Tokyo inflation data, a leading indicator of the national performance.
Bank of Japan Governor Kazuo Ueda said on Monday that the central bank would proceed cautiously with inflation targeting.
Sterling and the New Zealand dollar rose to more than two-month highs. They last bought $1.2786 and $0.6162 respectively.
The dollar rose 0.25%. On Wednesday, monthly data on the consumer price index in Australia will be published.
In cryptocurrencies, Bitcoin fell 1.5% to $68,571 and Ether rose 0.3% to $3,903.05.