Kevin Backlund
TOKYO (Reuters) – The dollar hovered near a one-month high against the euro and rose to a one-week high against the yen on Tuesday as traders braced for the next day’s key U.S. inflation data and new interest rate forecasts from the Federal Reserve.
The US dollar was supported by rising Treasury yields following unexpectedly strong US employment data last weekend, dramatically reducing expectations of a rate cut by the Fed this year.
The Bank of Japan announces policy on Friday and investors expect the bank to cut its monthly bond purchases as early as that meeting, but the wide yield gap with the United States has put the yen on the defensive.
The dollar briefly hit 157.335 yen, its highest level since June 3, before rising 0.15% to 157.275 yen.
The euro was flat at $1.076825 after falling to $1.0733 on Monday, its lowest since May 9, after far-right forces made gains in European elections and French President Emmanuel Macron called early general elections.
The pound was flat at 1.27355 to the dollar, ahead of labour data due later in the day expected to show a slowdown in the decline in British employment.
The U.S. dollar index against the three major currencies – the euro, pound and yen – was little changed at 105.12, after hitting 105.39 on Monday for the first time since May 14.
Economists surveyed by Reuters expect U.S. headline consumer price inflation to ease to 0.1 percent from 0.3 percent last month, while core price pressures will be stable at 0.3 percent month-on-month.
No policy changes are expected at the end of the Fed’s two-day policy meeting, which ends Wednesday, but officials are expected to update their economic and interest rate outlooks.
“We expect the Fed to remain cautious and emphasize its reliance on data and the need to see further evidence that deflationary trends are sustained to give it the confidence to further ease rates,” said Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions.
“As always, data is driving the charge.”
Officials have become more hawkish since their last announcement in March, when they expected a quarter-point cut this year, and markets are now pricing in just 37 basis points of cuts by December.
Meanwhile, according to reports from Reuters and other news agencies, many analysts and investors predict that the Bank of Japan’s monthly bond purchases will fall by 1 trillion yen ($6.4 billion) to around 5 trillion yen.
“The danger for the BOJ is a ‘buy the rumour, sell the fact’ type of reaction,” which would send the dollar “breaking through” technical resistance at 157.70 yen, said Tony Sycamore, market analyst at IG.
The Bank of Japan and the government are united in trying to prevent a weak yen from spoiling a desirable cycle of moderate inflation and steady wage increases.
Following the yen’s sudden fall to a 34-year low of 160.245 yen to the dollar at the end of April, the Japanese government carried out multiple interventions totaling 9.79 trillion yen.
(1 dollar = 157.1400 yen)
(Reporting by Kevin Buckland and Edwina Gibbs Editing)
