Dollar holds gains ahead of US inflation test

By Rae Wee

SINGAPORE (Reuters) – The dollar steadied on Thursday after paring some of its sharp losses from previous sessions, as traders looked ahead to a key U.S. inflation index later in the week that could offer further clues about the interest rate outlook there.

Friday's release of the core personal consumption expenditures (PCE) index – the Federal Reserve's preferred inflation measure – is the headline figure in a week that has otherwise been lacking in major market-moving data, leaving currencies mostly range-bound.

Still, the dollar held on to overnight gains in early Asian trading on Thursday, after rising 0.48 percent against a basket of major currencies in the previous session. Analysts also attributed the rise to month-end demand.

The euro had fallen below its 13-month high and was last at $1.1130. The pound sterling rose 0.08 percent to $1.3201, but was still far from Tuesday's high of $1.3269, its highest since March 2022.

The Australian dollar fell from its eight-month high and was last at $0.6793.

“PCE is definitely the most important reading in the U.S. this week, but I doubt it will significantly change market expectations about FOMC policy unless there is a clear miss,” said Carol Kong, currency strategist at the Commonwealth Bank of Australia.

According to the CME FedWatch tool, markets have fully priced in a 25 basis point Fed rate cut next month, with the probability of an excessive 50 basis point cut at 34.5 percent.

Investors' bets on imminent rate cuts in the US were further bolstered by Fed Chairman Jerome Powell's comments in Jackson Hole last week that “the time has come” to cut rates, joining a chorus of Fed policymakers who have hinted as much recently.

The prospect of lower U.S. interest rates next month has sent the dollar reeling after it benefited largely from the Fed's aggressive tightening cycle and expectations of a possible rate hike over the past two years.

The greenback has since fallen about 2.9 percent so far this month, putting it on track for its biggest monthly loss in nine months.

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The dollar index was last at 100.94, stabilizing after falling to a 13-month low of 100.51 on Tuesday.

In other currencies, the New Zealand dollar rose 0.2 percent to $0.6258, while the yen was last little changed at 144.57 to the dollar. An increase of 3.7 percent had been expected for the month.

In contrast to an impending Fed easing cycle, Bank of Japan (BOJ) policymakers have signaled that the central bank will continue to raise interest rates if inflation remains on track, providing some relief to the Japanese currency, which has come under enormous pressure due to sharp interest rate differentials.

“With the Fed now moving closer to a rate cut and the BOJ normalizing still-negative real policy rates, the USD/JPY rate should fall closer to its fair value of around 135,” Lombard Odier strategists said in a note.

(Reporting by Rae Wee; Editing by Shri Navaratnam)