Dollar holds gains ahead of US inflation test By Reuters

By Rae Wee

SINGAPORE (Reuters) – The dollar steadied on Thursday as it pared some of its steep losses from earlier sessions, with traders eyeing a key U.S. inflation reading later in the week that could provide further clues on rate prospects there.

Friday’s release of the core price index for personal consumption expenditures (PCE) – the Federal Reserve’s preferred measure of inflation – caps a week that has otherwise been devoid of major market-moving data, leaving currencies largely range-bound .

However, the dollar held on to overnight gains in early Asian trade on Thursday after rising 0.48 percent against a basket of majors in the previous session. Analysts also attributed the increase in demand from the end of the month.

The euro is off a 13-month high and last bought $1.1130. Sterling rose 0.08% to $1.3201, but was some distance from Tuesday’s peak of $1.3269, the strongest level since March 2022.

The Australian dollar fell from an eight-month high and was last at $0.6793.

“PCE is certainly the biggest print this week in the US, but I doubt it will materially change market expectations for FOMC policy unless there is a significant misstep,” said Carol Kong, currency strategist at Commonwealth Bank of Australia (OTC:).

Markets have fully priced in a 25 basis point rate cut from the Fed next month, with a 34.5% chance of a whopping 50 basis point cut, according to CME’s FedWatch tool.

Investors’ bets on imminent US interest rate cuts were further bolstered by Fed Chairman Jerome Powell’s remarks in Jackson Hole last week that “the time has come” to cut rates, joining a chorus of factors Fed decisions that have signaled the same lately.

The prospect of a U.S. interest rate cut next month rattled the dollar, which has for most of the past two years been buoyed by the Fed’s aggressive tightening cycle and expectations of how much higher rates could rise.

Since then, the greenback has fallen about 2.9% for the month to date, putting it on track for its steepest monthly decline in nine months.

It was last at 100.94, holding on from its fall to a 13-month low of 100.51 on Tuesday.

In other currencies, the New Zealand dollar rose 0.2% to $0.6258, while the yen was last little changed at 144.57 per dollar. It was set to rise 3.7% for the month.

In contrast to the Fed’s impending easing cycle, Bank of Japan (BOJ) policymakers have signaled that the central bank will continue to raise interest rates if inflation holds its course, providing some relief to the Japanese currency, which has come under immense pressure due to large interest rate differentials.

“With the Fed now closer to cutting interest rates and the BOJ normalizing still-negative real policy rates, it should fall closer to its fair value of around 135,” strategists at Lombard Odier said in a note.