By Kevin Buckland
TOKYO (Reuters) – The dollar fell to a one-month low against the euro on Wednesday amid lower government bond yields, as traders braced for a key U.S. inflation report later in the day that could predict the path of could determine Federal Reserve policy.
However, the yen hovered close to two-week lows as a still-yawning yield gap between local bonds and U.S. bonds continued to fuel selling of the Japanese currency.
The euro rose 0.03% to $1.0823 during Asian trading hours, having previously risen to $1.0828 for the first time since April 10.
The currency – which measures the currency against six top rivals but is heavily weighted towards the euro – fell 0.11% to 104.94, after earlier falling to a 1-1/2 week low of 104, 92.
Long-term U.S. Treasury yields fell to 4.4414%, extending their 3-1/2 basis points (bp) decline overnight.
Wednesday’s report on core consumer prices is expected to show that the CPI rose 0.3% month-on-month in April, compared with 0.4% growth the month before, according to a Reuters poll.
“The market will sink together or swim together,” Deutsche Bank strategist Alan Ruskin wrote in a note, noting the “extremely rare” concentration of analyst forecasts of 0.3%.
He noted that expectations about the path of interest rates are “a little more persistent than normal” and that it would take more than a single modest upside or downside surprise to move markets significantly.
However, in the event of a “large upside miss” of 0.5% or more, “early thoughts of the next step which could potentially be a rate hike would lead to a very large repricing of rates and a large increase in the USD against all currencies,” he said. .
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Fed Chairman Jerome Powell on Tuesday gave a bullish assessment of the state of the US economy, with prospects for continued above-trend growth and confidence in falling inflation that, while eroded by recent data, remains largely intact.
Higher-than-expected consumer prices in the first quarter of the year drove a sharp repricing of the pace of Fed rate cuts, with expectations now down to around 45 basis points of cuts this year.
Despite the dollar’s general weakness against the majority of its peers, it continued to rise against the yen. The dollar fell 0.12% to 156.245 yen on Wednesday, but had risen to 156.80 overnight.
Unlike those in the US, Japan’s long-term interest rate stands at just 0.955%, even as the Bank of Japan’s rhetoric has become more aggressive in recent days and prospects for another rate hike in June have increased.
The dollar’s rise to a 34-year peak of 160,245 yen on April 29 triggered two rounds of aggressive yen buying that traders and analysts suspect was the work of the BOJ and Japan’s finance ministry.
“The BOJ will hope that tonight’s US CPI release is in line with expectations to avoid the need for a difficult conversation tomorrow about when is the right time to begin a third round of intervention – bearing in mind that recent two laps have not yet turned the situation around.” the yen’s fortunes,” Tony Sycamore, an analyst at IG, wrote in a client note.
Elsewhere, the yuan bounced back from a two-week low against the dollar after a report on a possible plan to ease the country’s housing shortage boosted sentiment, outweighing US President Joe Biden’s decision to implement sharp impose tariff increases on a range of Chinese goods.
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The dollar fell 0.24% to 7.2232 yuan in offshore trading, after hitting its highest level since May 1 at 7.2460 overnight.
Antipodes currencies also benefited from Chinese optimism, with the Australian dollar rising 0.32% to $0.6648, having previously reached $0.6651 since March 8.
The New Zealand dollar rose 0.37% to $0.6062, having previously reached $0.6064 for the first time since April 10.
