Title: Dollar takes breather ahead of U.S. inflation test

Jun 10, 2022 02:10AM ET

By: AnalysisWatch

The dollar hit a two-week high against the euro ahead of US Federal Reserve inflation data to guide policy tightening and after the European Central Bank announced it will start raising interest rates next month.

Data due to be released today is expected to show a slight slowdown in the underlying rate of increase in US consumer prices. The results reassure those who expect 10-year inflation to have peaked in March and indicate that the April decline is not an isolated case.

It could give the Fed room to rise interest rates modestly later this year in order to keep inflation under control without causing a recession.

In the short term, the market expects the Fed to announce next week the second of three consecutive 50-basis-point rate hikes that have supported the dollar in recent months. Two-thirds of respondents to a Reuters survey of analysts expect another 25 basis point rate hike in September.

The Dollar Index, which measures the dollar against six other currencies, fell 0.27% to 103.1, but rose 0.94% this week. This is the largest increase since the last week of April.

Analysts say the index appears to be stabilising in the 101-105 range and could rise if the US consumer price index and next week's Fed meeting highlight the possibility of a US interest rate hike.

Elsewhere, the dollar lost some of its recent gains against the yen, falling 0.35% to 133.85 yen, but is still within range of Thursday's 20-year high of 134.55 yen.

Analysts say Japanese investors in overseas assets are cutting back on currency hedging due to the weaker yen, after Japanese life insurers announced plans to reduce currency hedging earlier this year.

The risk-sensitive Australian dollar rose 0.35% to USD 0.7122, but is still down 1.2% for the week due to falling stock markets, while the pound gained slightly against the dollar to USD 1.2513.