The dollar is on the defensive, next key test is inflation data

The dollar is on the defensive

The dollar turned defensive on Tuesday against other major currencies, as traders were hesitant to drive the greenback higher without any further indications that a Federal Reserve interest rate hike will occur soon.

Wednesday’s inflation data was shaping up as the next key test for the dollar, which rose sharply after Friday’s unexpectedly strong jobs report fuelled bets on another 75-basis-point rate hike.

On Tuesday, however, the currency succumbed to a mild selling pressure in thin summer markets.

Euro prices rose around 0.35% to $1.0226 at 1050 GMT, sterling prices rose 0.2% to $1.2102, and the dollar dipped 0.1% to 134.86 yen.

The dollar index, which measures the currency’s value against a basket of peers, fell 0.2% to 106.15. That was below Friday’s peak of 106.93 by more than one week.

I’m a little concerned about inflation tomorrow. If we get a strong core inflation print in September, that will nail expectations for a 75 bps rate hike in September,” said Kenneth Broux, a currency strategist at Societe Generale in London.

It’s too early to say it’s time to short the dollar as the Fed may need to do more.”

In June and July, the Fed raised rates by 75 basis points. The money-market futures market shows about a two-thirds chance that rates will rise by 75 basis points next month.

Inflation (USCPNY=ECI) is predicted to be 8.7% year-on-year (Reuters polled economists). However, that’s below last month’s figure of 9.1%. Inflation is targeted at 2% by the Fed.

Expectations of aggressive near-term hikes have pushed short-dated Treasury yields higher. In the past two decades, the gap between two- and 10-year Treasury yields has grown to its largest level.

Inversion of the U.S. yield curve suggests recession, but equity markets appear to be betting that the Fed will stop soon and start cutting in 2023, according to Colin Asher, senior economist at Mizuho.

In my opinion, tomorrow’s CPI data will indicate that the Fed is not going to stop, which will limit any dip in the dollar in the near future.

With growth and geopolitical concerns swirling, the dollar’s reaction can be harder to predict due to its haven status.

Earlier this week, Chinese military drills were extended near Taiwan, and the self-ruled island’s foreign minister said the drills were a protest against US.

Meanwhile, the New Zealand dollar held steady at $0.6289, while Australia’s dollar weakened a bit to $0.6977.

The dollar is on the defensive
The dollar is on the defensive

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