The dollar was steady on Tuesday as investors awaited the
crucial inflation report this week that will likely shape the U.S. rates
outlook, while the yen was hovering near a two-week low, stoking intervention
worries.
The currency market has been sedate this week, with
investors seeking to gauge what path the Federal Reserve will take this year in
the wake of recent softer-than-expected U.S. labour market data and comments
from officials that indicated the U.S. central bank was unlikely to raise rates
further.
Investors have had to dial back their expectations of rate
cuts this year due to sticky inflation and are now pricing in 42 basis points
of easing this year, compared with 150 bps of easing anticipated at the start
of 2024.
They are also pricing in a 60% chance of a cut in September,
versus 75% a month earlier, according to CME FedWatch tool.
All eyes this week will be on the consumer price index
(CPI)on Wednesday which is expected to show that core consumer prices rose 0.3%
month-on-month in April, down from 0.4% growth the prior month, according to a
Reuters poll.
But before that, U.S. Producer Price Index (PPI) is due to
be released later on Tuesday, which analysts will parse through to get a sense
of whether inflation is heading towards the Fed's target of 2%.
"A softer CPI, coming on the heels of a weaker payrolls
report, will reignite market expectations of a July rate cut, weighing on the
dollar," said Nicholas Chia, Asia macro strategist at Standard Chartered
The euro eased a bit to $1.0786 but is up 1% against the
dollar so far this month, while sterling last bought $1.2559, up roughly 0.5%
so far in May.
The dollar index , which measures the U.S. currency against
six rivals, was last at 105.27. The index has slipped about 1% in the month.
Nearly two-thirds of economists expect the Fed to cut its
key interest rate twice this year, starting in September, a Reuters poll
showed. That's up from a just over half of economists in the previous survey.
With no rate cuts possible until July and not likely until
September, and the next earnings season two months away, there are no apparent
catalysts to change the near-term direction of markets other than inflation and
economic data, said Vasu Menon, managing director of investment strategy at
OCBC.
U.S. retail sales will also be reported on Wednesday and
industrial production data on Thursday.
"Any signs that the U.S. economy is cooling should be
positive for global markets because it also means a benign outlook for U.S.
inflation and interest rates," Menon said.
YEN WORRIES
Traders are back on tenterhooks as the yen nears levels that
saw suspected interventions by Tokyo. It was last at 156.41 per U.S. dollar,
having touched a two-week low of 156.50 earlier in the session.
Japan's Ministry of Finance is suspected to have intervened
in the currency market at the end of April through 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
massive gap between Japan's ultra-low yields and those in other major
economies.
Japan's Finance Minister Shunichi Suzuki said on Tuesday the
government will closely work with the Bank of Japan on the foreign exchange to
ensure there is no friction between their mutual policy objectives.
"We'll take all possible measures to closely monitor
the currency," Suzuki said, adding it is important for the exchange rate
to move in a stable manner reflecting fundamentals, rather than focusing on its
level.
The yen was briefly supported on Monday when the Bank of
Japan sent a hawkish signal by cutting its offer amount for a segment of
Japanese government bonds.
In other currencies, the Australian dollar was 0.11% lower
at $0.6601, while the New Zealand dollar was flat at $0.6016. Reuters