Kevin Buckland
TOKYO (Reuters) – The dollar fell to a one-month low against the euro on Wednesday as Treasury yields fell as traders braced for a key U.S. inflation report later in the day that could shape the course of Federal Reserve policy.
However, the yen hovered near a two-week low as a still wide yield gap between local bonds and US peers continued to drive selling of the Japanese currency.
The euro was up 0.03% at $1.0823 in Asian trading hours, having previously risen to $1.0828 for the first time since April 10.
The index, which measures the currency against six major rivals but is heavily weighted on the euro, was down 0.11% at 104.94 after falling to a one-and-a-half week low of 104.92 earlier.
Benchmark long-dated U.S. Treasury yields eased to 4.4414%, extending a 3-1/2 basis points (bps) decline overnight.
Wednesday’s core consumer prices report is expected to show the consumer price index rose 0.3% month-on-month in April, down from a 0.4% rise in the previous month, according to a Reuters poll.
“The market will either sink or swim,” Deutsche Bank strategist Alan Raskin wrote in a note, pointing to the “extremely rare” concentration of analyst forecasts at 0.3%.
He noted that expectations for interest rate movements are “a little more resilient than usual” and that it would take more than one modest upside or downside surprise to move markets significantly.
However, in the event of a “big miss up” of 0.5% or more, “early thoughts that the next move might be a hike could lead to a very large repricing of rates and a significant rise in the US dollar against all currencies,” he said. He. .
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Fed Chairman Jerome Powell gave an upbeat assessment of the U.S. economy on Tuesday, forecasting continued above-trend growth and confidence in lower inflation, which, although dented by recent data, remains largely unchanged.
Higher-than-expected consumer prices in the first quarter of the year were the driving force behind the Fed’s sharp reversal of the pace of rate cuts, with rates now cut to about 45 bps. decline this year.
Despite the dollar’s significant overnight weakness against most currencies, it continued to rise against the yen. The dollar fell 0.12% to 156.245 yen on Wednesday but rose to 156.80 overnight.
In contrast to its U.S. peers, long-term Japanese bond yields are just 0.955%, even as the Bank of Japan’s rhetoric has become more hawkish in recent days and the prospect of another rate hike in June is growing.
The dollar’s surge to a 34-year peak of 160.245 yen on April 29 triggered two rounds of aggressive yen buying that traders and analysts suspect was the work of the Bank of Japan and Japan’s Finance Ministry.
“The BOJ hopes that today’s release of the US CPI will be in line with expectations to avoid having to have a difficult conversation tomorrow about when the right time to launch a third round of intervention will be, given that the last two rounds have yet to make a difference. the state of the yen,” wrote Tony Sycamore, an analyst at IG, in a note to a client.
Elsewhere, the yuan rebounded from a two-week low against the dollar as reports of a possible plan to ease the country’s housing glut boosted sentiment, outweighing U.S. President Joe Biden’s decision to impose sharp tariff hikes on a range of Chinese goods.
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In offshore trading, the dollar fell 0.24% to 7.2232 yuan, after hitting an overnight high since May 1 at 7.2460.
Antipodean currencies also benefited from Chinese optimism, with the Australian dollar up 0.32% at $0.6648 after previously hitting $0.6651 for the first time since March 8.
The New Zealand dollar rose 0.37% to $0.6062, having previously touched $0.6064 for the first time since April 10.