Dollar tiptoes toward inflation, Powell testimony

SINGAPORE (Reuters) – Currency markets were on edge and the dollar a few ticks lower on Tuesday, ahead of U.S. inflation data which traders think could offer clues about the timing of tapering and rate hikes.

The possibility of hikes – brought to the fore by a surprise shift in tone last month from the Federal Reserve – has boosted the dollar in recent weeks as investors have re-assessed their assumption of prolonged low U.S. rates.

Against the euro the greenback inched a fraction lower during the Asia session to $1.1868, though that still has the dollar up about 2.2% on the common currency in a month.

Aside from looming U.S. inflation data, further moves in the euro were kept in check by comments on Monday from European Central Bank President Christine Lagarde, who flagged a dovish change in forward guidance.

Economists polled by Reuters expect the U.S. consumer price index to have risen 0.5% from May and 4.9% from a year earlier. Dealers reckon a miss on either side could move the greenback and the bond market by shifting expectations on interest rates.

“My back-of-the-envelope playbook is that we’d need a headline year-on-year number north of 5.5% to really set this market ablaze,” said Chris Weston, head of research at broker Pepperstone, saying that could lift bond yields and the dollar.

“A number below 4.5% on the headline print and we should see USD/JPY and USD/CHF under pressure,” he said.

Societe Generale strategist Kit Juckes similarly sees risks to the dollar on the downside, and expects a bigger reaction – boosting the yen – if inflation does indeed fall short and investors reckon easy policy can last a bit longer.

The data is due at 1230 GMT.

In Asia the Japanese currency last stood at 110.37 per dollar. The Swiss franc was steady at 0.9146 per dollar, close to a one-month high. The Australian dollar rose slightly to $0.7491 and sterling was up 0.1% at $1.3895.

POWELL, RBNZ AHEAD

Beyond inflation, further tests loom for the dollar from forthcoming appearances by Federal Reserve officials with markets hyper sensitive to any talk of early tapering.

Chair Jerome Powell testifies before Congress on Wednesday and Thursday while officials Neel Kashkari, Raphael Bostic and Eric Rosengren make appearances on Tuesday. [FED/DIARY]

Traders are also looking to New Zealand on Wednesday, when inflation data is due and the central bank meets for the first time since a strong business survey prompted swaps markets to price in rate hikes beginning as soon as November.

The Reserve Bank of New Zealand is not expected to change policy or publish forecasts, but a guidance tweak is possible.

“The narrative should endorse current market pricing,” Westpac analyst Imre Speizer said in a note, a move which he said could give the kiwi a slight lift. “Our hawkish scenario (a 25% chance we think) comprises an implicit signal that tightening could start at any time over the next few meetings.”

The New Zealand dollar was last up 0.1% at $0.6993, just below its 20-day moving average. [NZD/]

Elsewhere, China’s yuan rose to a near one-week high after surprisingly strong trade data eased fears about a slowdown in what has been the world’s strongest economic recovery.

It last traded at 6.4655 per dollar.

The U.S dollar index was steady at 92.222. Cryptocurrencies came under pressure, with bitcoin down 1% at $32,789 and ether having fallen below its 200-day moving average to $1,990.

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