By Stefano Rebaudo
(Reuters) -The dollar eased against most currencies on Tuesday, ahead of key inflation data from the U.S. and euro zone later this week that could impact expectations for major central banks’ monetary policy outlook.
The dollar was also on the verge of its first monthly decline in 2024.
“A situation where the Federal Reserve could start cutting rates this year, even in December, is consistent with further dollar weakness,” said Athanasios Vamvakidis, global head of forex strategy at BofA. He cited some weakness in U.S. economic data and recent stronger-than-expected euro zone data as the main reasons for the dollar’s slowdown.
He also emphasized that the Fed has resisted speculation about possible rate hikes, which has prevented the dollar from further appreciation.
Markets are currently more than fully priced for a US interest rate cut in December. They also consider an 80% chance of such a move in November and a 60% chance in September.
Against a basket of currencies, the dollar fell 0.09% to 104.47, down 1.76% month-on-month.
The euro rose 0.13% to $1.0872, despite some dovish comments from European Central Bank (ECB) policymakers on Monday and data showing German business morale stagnated in May.
The ECB’s Francois Villeroy de Galhau confirmed market expectations that, barring any major surprises, a first rate cut next week is a foregone conclusion. But investors have recently adjusted their expectations for future ECB moves, pricing in less than a quarterly cut in 2024 and early 2025.
German inflation data due on Wednesday and broader eurozone data on Friday will be watched for clues on how quickly central bank easing could come.
The dollar got some support from US data showing a surprise rise in consumer confidence this month.
However, all this data will be an afterthought to the markets’ main focus on Friday, when the US Core Personal Consumption Expenditure (PCE) Price Index report – the Federal Reserve’s preferred inflation measure – is released. This is expected to remain stable on a monthly basis.
Analysts tried to gauge the impact of an upside surprise in the US data, as they believe the market is well priced for favorable data.
Derek Halpenny, head of research, global markets EMEA at MUFG Bank, said markets could be more sensitive to stronger-than-expected incoming data amid increased debate over the Fed’s implicit neutral policy stance.
Fed Governor Christopher Waller said last week that a key underlying rate crucial to monetary policy, the so-called R-Star, could rise after years of declines. R-star is the rate that neither stimulates nor constrains the economy while keeping inflation at the central bank’s target.
“This increased debate over the Fed’s implicit neutral policy stance could have an increasing impact on raising market rates if the economy fails to slow down,” Halpenny said.
The dollar/yen languished around 157 and was last at 156.92, up $0.04.
BofA’s Vamvakidis said a first Fed rate cut in 2024 “would also be consistent with a strengthening of the yen against the dollar.”
However, if markets were to discount a Fed that “starts easing its policy in 2025, the yen could test the 160 level again, and more interventions from Japanese authorities are likely,” he added.
The Bank of Japan’s (BOJ) three key measures of underlying inflation all fell below 2% in April for the first time since August 2022, data showed on Tuesday, increasing uncertainty over the timing of the next rate hike.
That comes ahead of Friday’s inflation data in Tokyo, a leading indicator of national figures.
BOJ Governor Kazuo Ueda said on Monday that the central bank will take a cautious approach to inflation targets.
The pound sterling and the New Zealand dollar both rose to their highest levels in two months. They last bought at $1.2772 and $0.6151 respectively.
The dollar traded 0.12% higher. Australia’s monthly consumer price index data will be released on Wednesday.
In cryptocurrencies, bitcoin fell 2.41% to $67,908, while ether fell 1.28% to $3,838.80.
