Dollar fluctuates as traders watch US inflation data; Fragile yen in focus By Reuters

Ankur Banerjee

SINGAPORE (Reuters) – The dollar remained steady on Tuesday as investors awaited this week’s inflation report, which is likely to shape the outlook for U.S. interest rates, while the yen hovered near a two-week low, raising concerns about intervention.

The currency market has been quiet this week as investors try to gauge which path the Federal Reserve will take this year following recent softer-than-expected US labor market data and comments from central banks.

They had to scrap their expectations for a rate cut this year due to persistent inflation, according to CME’s FedWatch tool, and now estimate 42 basis points of easing this year with a 60% chance of a cut in September.

All eyes this week will be on Wednesday’s CPI, which is expected to show the core CPI rose 0.3% month-on-month in April, down from the 0.4% rise in the previous month. according to a Reuters poll.

But before that, the US Producer Price Index is due to be released later on Tuesday, which analysts will analyze to see whether inflation is moving toward the Fed’s 2% target.

“The focus will be on the key items that make up core personal consumption expenditure (PCE), i.e. health services, portfolio management and domestic airfare,” said Tony Sycamore, market analyst at IG.

The euro was little changed at $1.0786 but has risen 1% against the dollar this month, while sterling last bought $1.2554, up about 0.5% in May.

The index, which measures the U.S. currency against six peers, was last at 105.25.

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

YEN IS WORRIED

Traders are again on edge as the yen approaches levels at which Tokyo was thought to have intervened. It was last at 156.32 per US dollar, having touched a two-week low of 156.40 earlier in the session.

Japan’s Ministry of Finance is believed to have intervened in the foreign exchange market in late April and 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 huge gap between Japan’s ultra-low yields and those of other major economies.

Japanese Finance Minister Shunichi Suzuki said on Tuesday that the government will work closely with the Bank of Japan on currency issues to ensure there are no differences between their mutual policy objectives.

“We will take all possible measures to closely monitor the currency,” Suzuki said, adding that it was important for the exchange rate to move steadily, reflecting fundamentals rather than focusing on its level.

The yen received brief support on Monday when the Bank of Japan sent a hawkish signal by reducing its supply of Japanese government bonds.

Meanwhile, the International Monetary Fund said Japan’s pledge to give the yen flexibility would help the central bank focus on achieving price stability, cautioning against growing calls from some analysts to use monetary policy to slow the currency’s decline.

In other currencies, the Australian dollar and New Zealand dollar were unchanged in early trade. The last one brought in $0.6608, and the second brought in $0.6017.