Harry Robertson
LONDON (Reuters) – The dollar inched closer to its highest level since November on Wednesday ahead of the Federal Reserve’s interest rate decision later in the day, after data on Tuesday showed more signs of inflationary pressure in the U.S. economy.
Meanwhile, the yen held steady after falling overnight to its lowest level since Japanese authorities were expected to intervene on Monday.
The index, which tracks the currency against six major peers, was last slightly higher at 106.33 after earlier approaching 106.51, which would be its highest since November 1.
Global markets were somewhat subdued as traders in many countries headed out for May Day or International Workers’ Day.
The euro was unchanged at $1.0669 after falling 0.52% the previous day as US data pushed the dollar higher.
Data released Tuesday showed U.S. labor cost growth accelerated in the first quarter of the year, with the Employment Cost Index (ECI) rising 1.2%, more than the 1% expected by economists.
A string of stronger-than-expected data has investors narrowing their bets on how much the Fed will cut interest rates this year. Traders on Wednesday expected a cut of just 29 basis points by December, down from more than 170 basis points at the start of the year.
Expectations that rates will remain high for a long time have sent U.S. bond yields sharply higher, making them more attractive and strengthening the dollar.
“The steady stream of better-than-expected US inflation data continues,” said Chris Turner, global head of markets at ING. “Yesterday it was the employment cost index’s turn to rise unexpectedly.”
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FOCUS ON POWELL
The Fed is expected to keep rates at 5.25-5.5% when it announces its decision at 2:00 pm ET (18:00 GMT) on Wednesday, but will focus on Chairman Jerome Powell’s comments on latest data.
“Jerome Powell will have to accept that US price trends have turned upward, activity remains strong and that any easing this year will have to be delayed,” Turner said.
The Japanese yen weakened slightly to 157.91 per dollar after earlier touching 158.
Traders cited Japanese authorities’ purchase of the yen as the trigger for the currency’s sharp rise to 154.4 per dollar on Monday after it fell to its lowest level since 1990 at 160.25.
Investor expectations that interest rates in Japan will remain low compared with U.S. rates have sent the currency down about 12% this year.
Strategists say Japanese authorities may well step in to support the currency in the coming days, judging by the pattern of repeated interventions in late 2022.
The pound was last traded at $1.2484, down 0.1% on the day and 1.9% on the year.
The Swiss franc fell to its lowest since October at 0.9223 per dollar on Wednesday. The franc’s fall followed an unexpected interest rate cut by the Swiss National Bank in March.
fell nearly 6% to below $58,000 as investors trimmed their bets on the Fed cutting rates this year, dealing a blow to rate-sensitive assets such as cryptocurrencies.
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