Dollar hovers near two-week lows ahead of inflation data

The employee of a currency exchange shop counts U.S. dollar banknotes in Ciudad Juarez, Mexico July 27, 2023. REUTERS/Jose Luis Gonzalez/File photo

SINGAPORE  – The dollar was rooted near a two-week low on Thursday following minutes from the last U.S. Federal Reserve meeting that showed policymakers taking a cautious stance and as investors awaited key inflation data.

The dollar index, which measures the U.S. currency against six rivals, was at 105.67, not far from 105.55, its lowest since Sept. 25 it touched on Wednesday. The index is down 0.4 percent for the week.

Fed officials pointed to uncertainties around the economy, oil prices and financial markets as supporting “the case for proceeding carefully in determining the extent of additional policy firming that may be appropriate,” according to the minutes released on Wednesday from the Sept. 19-20 meeting.

In recent comments, Fed officials have cited rising bond yields as a factor that may allow them to call it a day on their rate hike cycle.

READ: Dollar in holding pattern ahead of Fed minutes, US inflation test

Also keeping the mood cautious was a mixed report on U.S. producer prices, which increased more than expected in September amid higher costs for energy products and food. But underlying inflation pressures at the factory gate continued to abate.

“This (PPI data) is a reminder that the last mile of the fight against inflation is going to be a tough one,” said Ryan Brandham, head of global capital markets, North America at Validus Risk Management.

The report comes ahead of the release on Thursday of September’s consumer price index data, which is expected to show inflation moderated last month.

Fed’s tightening cycle

A downside surprise to inflation will likely support the case for the Fed to have finished its tightening cycle, thereby pulling down U.S. yields and the dollar, according to Carol Kong, a currency strategist at Commonwealth Bank of Australia.

“On the flip side, an upside surprise will likely encourage markets to reprice higher the chance the Federal Open Market Committee will follow through on its projected 25 basis point hike.”

Futures markets are pricing in a 26 percent chance of a 25 basis point hike in the December meeting and a 9 percent chance of a 25 basis point hike in November meeting, according to the CME FedWatch tool.

The dollar’s recent weakness has been driven by declining Treasury yields as bond prices rallied on the Fed’s softer stance on future rate hikes. Bond yields move opposite to their price. The yield on 10-year Treasury notes was down 3.5 basis points to 4.562 percent.

The euro was up 0.03 percent at $1.062, after touching an over two week high on Wednesday.

Two influential European Central Bank policymakers said on Wednesday the central bank has made progress in getting inflation back down to target, but new shocks could still require the bank to continue a now-paused tightening cycle.

The Japanese yen strengthened 0.03 percent to 149.11 per dollar, while sterling was last trading at $1.2311, flat on the day.

The Australian dollar rose 0.05 percent to $0.642, while the kiwi fell 0.03 percent to $0.602.