Dollar firm in calm before CPI and central bank storm

SINGAPORE  – The dollar was firm on Tuesday leading in to the release of U.S. inflation data and the final Federal Reserve meeting of the year, with investors waiting to update interest rate outlooks.

A month ago, a small surprise to the downside unleashed a wave of bond-buying and dollar selling on the expectation that inflation had peaked. The figures due at 1330 GMT will test that assumption, while Fed’s decision on Wednesday should provide some reasonably instant feedback from policymakers.

The dollar lifted 0.8 percent on the yen overnight and was steady at 137.62 yen in early Asia trade on Tuesday. It held gains at $0.6756 per Australian dollar.

Economists polled by Reuters expect November core inflation to be steady at 0.3 percent month-on-month but see moderation in the annual pace, with headline prices seen 7.3 percent higher than a year earlier.

“A miss in either direction may get the markets to assume a follow-up reaction from the Fed,” said NatWest Markets’ head of economics and strategy, John Briggs.

The U.S. dollar has been supported by high and rising interest rate expectations as the Fed has hiked its benchmark funds rate to counter inflation, leaving the currency vulnerable to selling if inflation seems to be cooling.

The dollar index hovered at 104.97 on Tuesday, down from a 20-year high of 114.78 in late September.

Market projections for the peak in U.S. interest rates have also slipped, with futures pricing indicating the Fed funds rate – currently set between 3.75 percent and 4 percent – staying below 5 percen.

The Fed is widely expected to hike the funds rate by 50 basis points on Wednesday, a step down in pace after four consecutive 75 bp hikes.

The euro, meanwhile, was steady at $1.0541, as was sterling at $1.2269. The Swiss franc was at 0.9360 per dollar as traders eyed Thursday meetings of the European Central Bank, Bank of England and Swiss National Bank.

Like the Fed, all are expected to hike by 50 bps.

The New Zealand dollar was steady at $0.6386. The Chinese yuan slipped a bit on Monday as enthusiasm about China’s re-opening prospects started to waver.