Dollar turns slightly defensive, inflation data next key test
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[August 09, 2022] By
LONDON (Reuters) - The dollar turned
defensive against other major currencies on Tuesday, with traders
reluctant to push the greenback higher without further signs that
another aggressive interest rate hikes from the Federal Reserve was
coming in September.
U.S. inflation data on Wednesday 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 bps Fed rate hike.
But the currency has pulled back since and in thin summer markets,
succumbed to some mild selling pressure on Tuesday.
At 1050 GMT, the euro was up around 0.35% at $1.0226, sterling gained
0.2% to $1.2102, while the dollar slipped 0.1% to 134.86 yen.
That left the dollar index, which measures the currency's value against
a basket of other peers, 0.2% lower at 106.15. It held below a more than
one-week peak hit on Friday at 106.93.
"I'm a bit concerned about inflation tomorrow. The market has been
wrong-footed all year and if we get a strong core inflation print 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 soon to say it's time to short the dollar as the Fed may have
to do more."
The Fed hiked rates by a hefty 75 bps in June and July. Money-market
futures show traders see about a two-thirds chance of a 75 bps hike next
month and have started pushing expectations for rate cuts deeper into
Economists polled by Reuters see year-on-year headline inflation at 8.7%
- incredibly high, but below last month's 9.1% figure. The Fed targets
inflation at 2%.
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U.S. Dollar banknotes are seen in this illustration taken July 17,
2022. REUTERS/Dado Ruvic/Illustration
Heightened expectations for aggressive near-term hikes, have pushed short-dated
Treasury yields further above long-term peers.
The gap between two and 10-year Treasury yields, a reliable recession indicator,
has grown to its largest in two decades. [US/]
"The U.S. yield curve is inverted, suggesting recession down the line. But
equity markets look as if they believe the Fed is going to stop soon and start
cutting in 2023," said Mizuho senior economist Colin Asher.
"I think tomorrow's CPI data will suggest the Fed is not going to stop, which to
me suggests weaker equity markets ahead which will limit any dip in the dollar
in the next few months."
The dollar's haven status, though, makes the greenback's reaction a little
harder to predict, especially as growth and geopolitical worries swirl.
China extended military drills near Taiwan, and the self-ruled island's foreign
minister said China was using the drills launched in protest against U.S. House
Speaker Nancy Pelosi's visit as an excuse to prepare for an invasion.
Elsewhere, the New Zealand dollar was steady at $0.6289, while Australia's
dollar was a touch softer at $0.6977.
(Reporting by Dhara Ranasinghe; Additional reporting by Tom Westbrook in
Singapore, Editing by Alex Richardson and David Evans)
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