On Wednesday, the dollar retreated to a one-month low against the euro amidst diminishing Treasury yields, as traders prepared for a pivotal U.S. inflation report later in the day, which could influence the trajectory of Federal Reserve policy.
Meanwhile, the yen remained near a two-week low, as the significant yield disparity between domestic bonds and their U.S. counterparts continued to prompt the sale of the Japanese currency.
During Asian trading hours, the euro inched up by 0.03% to $1.0823, having earlier ascended to $1.0828, marking its first foray since April 10.
The U.S. dollar index, which gauges the currency against six major rivals but is heavily weighted toward the euro, declined by 0.11% to 104.94, after touching a 1-1/2-week low of 104.92 earlier.
The benchmark long-term U.S. Treasury yield marginally decreased to 4.4414%, extending a 3-1/2-basis point (bp) decline from the previous session.
According to a Reuters poll, Wednesday’s report on core consumer prices is anticipated to reveal a 0.3% month-on-month increase in CPI for April, down from the 0.4% growth recorded the previous month.
Deutsche Bank strategist Alan Ruskin highlighted the “extremely rare” alignment of analysts’ forecasts at 0.3%, stating, “The market is going to sink or swim together.” He cautioned that rate path expectations are “a little more sticky than usual,” necessitating more than a solitary modest deviation to significantly sway markets.
Nevertheless, he emphasized that “a large upside miss” of 0.5% or more could prompt “early thoughts of the next move possibly being a hike,” leading to a substantial repricing of rates and a notable surge in the USD against all currencies.
Fed Chair Jerome Powell delivered an optimistic assessment on Tuesday regarding the state of the U.S. economy, foreseeing continued growth above trend and expressing confidence in declining inflation, albeit somewhat diminished by recent data.
The dollar, despite experiencing widespread weakness overnight against most counterparts, continued its ascent against the yen. On Wednesday, the dollar retraced by 0.12% to 156.245 yen, yet had previously climbed as high as 156.80 overnight.
In contrast to U.S. counterparts, Japanese long-term yields hover at a mere 0.955%, despite a more hawkish tone adopted by the Bank of Japan in recent days and mounting expectations for another rate hike in June.
Analysts speculate that the BOJ and Japanese finance ministry intervened following the dollar’s surge to a 34-year peak of 160.245 yen on April 29, triggering two rounds of aggressive yen purchasing.
Analyst Tony Sycamore from IG stated, “The BOJ will hope that tonight’s U.S. CPI release is in line with expectations to avoid the need for a difficult conversation tomorrow about when the appropriate time is to commence a third round of intervention – mindful that the past two rounds have yet to turn around the yen’s fortunes.”
Elsewhere, the yuan rebounded from a two-week low against the dollar on the back of reports suggesting a potential plan to alleviate China’s housing surplus. This optimism overshadowed U.S. President Joe Biden’s decision to implement substantial tariff hikes on various Chinese goods.
In offshore trading, the dollar depreciated by 0.24% to 7.2232 yuan, having peaked at 7.2460 overnight, marking its highest level since May 1.
Antipodean currencies also experienced gains amidst the positive sentiment surrounding China. The Australian dollar advanced by 0.32% to $0.6648, reaching $0.6651 earlier, its highest since March 8. Similarly, the New Zealand dollar surged by 0.37% to $0.6062, touching $0.6064, its highest level since April 10.