THE dollar eased yesterday after data showed US consumer inflation rose to its highest level in three years in May, though the reading was in line with economists’ expectations, marginally reducing the chances of the Federal Reserve hiking rates this year.
The dollar index, which measures the US currency against six peers, was 0.2 per cent lower at 99.75, but remained close to the two-month high of 100.214 touched on Monday.
“Traders are positioning for a more neutral statement from officials at next week’s meeting, and are modestly lowering expectations for a rate hike by year-end,” Schamotta said.
Traders of short-term US interest rates edged away from bets that the Federal Reserve will deliver a rate hike as soon as September, but continued to show strong conviction that a rate hike would arrive by October.
The US-Israeli conflict with Iran also kept traders on edge. “Even with the kind of re-upping of some of the tensions in the short term, actually the overall sentiment that we see more broadly is that we’re still closer to some kind of deal or agreement than further away,” said Dominic Bunning, head of G10 FX strategy at Nomura.
Meanwhile a Bank of Japan rate hike at a June 16 policy meeting is now almost fully priced in, meaning it is unlikely on its own to trigger a significant reversal in yen weakness if delivered.
“It’s going to take some hawkish commentary from Governor (Kazuo) Ueda that signals the BOJ could bring forward its next hike from December to September – with the possibility of a third hike before year-end,” said Tony Sycamore, market analyst at IG, in a note.
The Japanese yen was steady against the greenback at 160.34 per dollar, continuing to hover around the 160 level that is widely viewed as a line in the sand for official intervention.
A Reuters poll of economists indicated the BOJ will raise its key interest rate this month and again in the fourth quarter, taking borrowing costs to 1.25pc by the end of the year, as it grows more wary of inflation risks than downside hazards to the economy.
Sterling was 0.3pc higher against the dollar yesterday, as investors closely monitored the latest escalation in tensions between the US and Iran ahead of tomorrow’s UK GDP data.
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