Dollar slumps ahead of U.S. inflation data; yen, sterling jump

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By Rae Wee

SINGAPORE (Reuters) – The sank to a two-month low against major peers on Wednesday in the lead-up to a U.S. inflation reading, while sterling scaled a 15-month top on expectations the Bank of England (BoE) has further to go in raising rates.

The jumped to a one-month high and strengthened past 140 to the dollar for the first time in a month, helped by a slump in U.S. Treasury yields and bets for a policy tweak by the Bank of Japan (BOJ) at this month’s monetary policy meeting.

Investors were laser-focused on U.S. inflation data due later on Wednesday, with expectations for core consumer prices to have risen 5% on an annual basis in June and for the figures to provide further clarity on the Federal Reserve’s progress in its fight against inflation.

Ahead of the release, the U.S. dollar fell to a two-month low of 101.34 against a basket of currencies, extending its losses from the beginning of the week after Fed officials said the central bank was nearing the end of its monetary policy tightening cycle.

Against the yen, the dollar tumbled as much 0.7% to a one-month low, while the euro hit a two-month peak of $1.10365.

“We’re already seeing markets move in anticipation of a softer U.S. inflation report,” said Matt Simpson, senior market analyst at City Index. “That runs the risk of a ‘buy the rumour, sell the fact’ reaction if the figures come in around expectations.”

similarly peaked at a 15-month high of $1.2970, bolstered by bets the BoE will have to tighten monetary policy further to tame British inflation, running at the highest rate of any major economy.

Data out on Tuesday showed that a key measure of British wages rose at the joint fastest pace on record as basic earnings in the three months to May surged 7.3%, higher than expectations of a 7.1% rise.

Market pricing indicates roughly another 140 bps of rate increases by the BoE.

U.S. Treasury yields, meanwhile, came under pressure, with the and benchmark settling below 5% and 4%, respectively. [US/]

The slide in Treasury yields has provided some respite for the yen, given the sensitivity of the dollar/yen pair to U.S. yields while Japanese interest rates remain anchored near zero.

The yen was last more than 0.65% higher at 139.47 per dollar and looked set to clock a fifth session of gains, the longest winning streak in about seven months.

Analysts said the Japanese currency had also drawn support from expectations that the BOJ could tweak its yield curve control (YCC) policy at its meeting this month.

“Although steady policy appears to be the most likely outcome for the July policy meeting, it is widely expected to bring upgraded inflation forecasts and the market will continue to hope that the BOJ may offer some signal as to when YCC could be adjusted,” said Jane Foley, head of FX strategy at Rabobank.

“Speculation of a possible tweak could allow the (yen) some support ahead of the BOJ meeting this month.”

Elsewhere, the rose 0.47% to $0.6227, having fluctuated in choppy trade after the Reserve Bank of New Zealand (RBNZ) kept rates on hold as expected and flagged that they would remain on hold for some time.

“The (RBNZ) statement and minutes retained their dovish undertone overall, but they can’t not warn that inflation is still ‘too high’ as they need to contain inflation expectations,” said City Index’s Simpson.

“But with an economy now in recession, it’s a relatively safe bet that we’ve seen the terminal rate. And that means the next theme for investors to obsess over is when the RBNZ will begin cutting rates.”

The gained 0.52% to $0.6722.

Australia’s central bank Governor Philip Lowe said it remained to be determined whether there was more work to be done on monetary policy, but it was possible that further tightening was needed to tame inflation.

 

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