May 28 2024: The dollar edged down on Tuesday, remaining in tight ranges against its peers ahead of key inflation data from major economies this week, which could influence the global interest rate outlook. The greenback is on the verge of its first monthly decline in 2024.
“A scenario where the Federal Reserve could start cutting rates this year, even in December, aligns with further dollar weakness,” said Athanasios Vamvakidis, global head of forex strategy at BofA. He cited weak U.S. economic data and stronger-than-expected euro zone figures as main drivers of the dollar’s slowdown. Vamvakidis also noted that the Fed’s pushback against rate hike speculation has prevented the dollar from appreciating further.
Markets are heavily pricing in a U.S. rate cut in December, with an 80% chance of such a move in November and a 60% chance in September.
Against a basket of currencies, the dollar was down 0.11% to 104.44, marking a 1.7% decline for the month.
The euro rose 0.16% to $1.0876, despite dovish comments from European Central Bank (ECB) policymakers and data showing stagnation in German business morale in May. ECB’s Francois Villeroy de Galhau confirmed market expectations of a rate cut next week, barring major surprises. However, investors have adjusted their bets, anticipating less frequent cuts through 2024 and early 2025.
Upcoming German inflation data on Wednesday and the euro zone’s reading on Friday will provide further clues on the ECB’s easing timeline.
The main focus for markets is the U.S. core personal consumption expenditures (PCE) price index report, due on Friday. This is the Federal Reserve’s preferred measure of inflation, and it is expected to remain steady on a monthly basis.
“The market is well priced for a benign number, which is necessary to sustain current Fed cut expectations for this year,” said Rodrigo Catril, senior FX strategist at National Australia Bank. “Any upside surprise in the data could trigger a significant increase in U.S. yields and a stronger dollar.”
The yen was near 157 per dollar, last standing at 156.67 per dollar. Vamvakidis noted that a scenario of Fed rate cuts in 2024 would likely strengthen the yen against the dollar. However, if the Fed delays easing until 2025, the yen could test the 160 level again, possibly prompting further interventions by Japanese authorities.
Bank of Japan (BOJ) data showed that three key measurements of underlying inflation fell below 2% in April for the first time since August 2022, adding uncertainty to the timing of the next interest rate hike. This precedes Friday’s Tokyo inflation data, a leading indicator of nationwide figures. BOJ Governor Kazuo Ueda said the central bank would proceed cautiously with inflation-targeting frameworks, citing unique challenges for Japan after years of ultra-easy monetary policy.
Sterling and the New Zealand dollar both reached over two-month highs, last buying $1.2783 and $0.6165, respectively. The Aussie dollar edged 0.15% higher, with Australian monthly consumer price index data due on Wednesday.
In cryptocurrencies, bitcoin slid 2.6% to $67,778, while ether fell 0.9% to $3,853.50.
