Investing.com – The US dollar fell on Thursday, as traders weighed the competing factors of benign US inflation and a more hawkish Federal Reserve.
At 04:25 ET (08:25 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.3% at 104.340, after trading at its strongest level since mid-May earlier in the week. .
The dollar awaits the release of the producer price index
The dollar saw some choppy trading on Wednesday, falling in the wake of the US inflation report, which showed flat month-on-month in May versus market expectations for a 0.1% rise.
Before paring some of those losses when he left the funds rate hanging at 5.25%-5.5%, and clarifying that policymakers' average forecast for the number of cuts this year fell to just one, from three in March.
However, economists at Goldman Sachs said in a note: “We still expect a first rate cut in September and a second cut in December.”
This puts Thursday's release firmly under the microscope, with the headline figure expected to show monthly growth of 0.1% in May, down from growth of 0.5% the previous month.
The statement, which excludes volatile food and energy prices, is expected to show monthly growth of 0.3%, down from growth of 0.5% in the previous month.
“Today’s weak PPI reading will raise expectations for another ‘on target’ reading of 0.2% m/m for core personal consumption expenditures and give the Fed and the market more confidence that the central bank may be able to cut interest rates in September,” he said. “After all,” analysts at ING said in a note. “That's why we have stocks down on the dollar today.”
Euro rises after more inflation data
The index rose 0.1% to 1.0812, extending its gains after rising 0.6% overnight, as traders digested more regional inflation data.
It decreased by 0.7% in May compared to the same month last year, while it rose by 3.6% year-on-year in May.
“EUR/USD performed well rising to 1.0850 yesterday and perhaps indicates that we are in a wide trading range of sorts between 1.0720-1.0900 in the near term,” ING said.
“Here, the two opposing forces will be weak US price and activity data that will likely pull the dollar group into a lower group against French political risks, where an additional risk premium could still be built into the euro.”
It fell 0.1% to 1.2790, after rising 0.5% overnight to $1.2798 after US inflation data was released, with the UK releasing its monthly CPI figure next week.
“The UK CPI for May will be released next Wednesday, and the flat core services component may fall (5.9% y/y in April),” ING said. “This is why we are reluctant to chase the current rally in GBP and are likely to see the top of this year's range hold at 1.2850/2900.”
Bank of Japan meeting scheduled
In Asia, trading rose 0.3% to 157.23, with traders now awaiting further signals on policy from Friday.
The central bank is likely to keep interest rates steady, but is expected to reduce some of its bond purchases in an attempt to tighten policy.
The index rose 0.2 percent to 7.2519, approaching its highest levels in six months, as sentiment towards the yuan was affected this week by reports of further US trade scrutiny against China.