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Dollar stuck near 5-month low as caution reigns ahead of U.S. CPI, ECB tests

The dollar continued to hover near a five-month low versus major peers on Thursday as investors looked to key U.S. inflation data and a European Central Bank meeting later in the day to potentially set the direction for currency markets.

Investors have adopted a wait-and-see attitude all week, sucking volatility from the market and leaving major currencies mostly range-bound.

The dollar index has fluctuated narrowly around the psychologically important 90 level, and was last at 90.137.

The euro rose to a one-week high at $1.2218 on Wednesday only to finish little changed, and was essentially flat at $1.2178 in Asia.

The yen traded at 109.62 per dollar, also little changed from Wednesday and near the middle of the 109.19-110.325 range of the past two weeks.

Deutsche Bank’s Currency Volatility Index languished at its lowest level since February 2020.

The U.S. Labor Department’s consumer prices data has been much anticipated after last month’s report showed consumer prices increased by the most in nearly 12 years in April.

That has stoked bets that higher prices could last longer than some anticipate, potentially calling into question the Federal Reserve’s insistence that current inflation pressures are transitory and monetary stimulus should stay in place for some time yet.

Economists polled by Reuters estimated the CPI advanced 0.4% in May.

While the greenback has kept to tight ranges in the run-up to the report, benchmark 10-year Treasury yields — which helped drive the dollar index to a multi-year high earlier this year — has taken a sizeable step lower in the past week and was at 1.4874% in Asia from as high as 1.6350% on Friday.

“It feels like the balance of risk is tilted to the upside on U.S. CPI versus the consensus, which would favour a sell-off in Treasuries – (and thus) higher yields – and subsequently a stronger USD,” Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a note to clients.

“Bonds seem overbought.”

With the ECB, investors will be watching for any clues of an imminent slowdown to its bond-buying program.

While the ECB is widely expected to keep policy settings steady, the euro could be sensitive to changes in the bank’s economic forecasts or any signal that the pace of bond buying could be reduced in months ahead.

In crypto markets, bitcoin held gains from its biggest rally in four months on Wednesday, when it jumped nearly 12%. It last traded little changed at $37,097.02, after rebounding from a three-week low of $31,025 hit on Tuesday when signs of institutional investor caution and regulatory attention drove selling.

Dollar subdued as investors look to key U.S. inflation gauge

The U.S. dollar was subdued on Tuesday as investors looked to U.S. inflation data due later in the week after softer-than-expected jobs data quelled expectations of an early tapering in the Federal Reserve’s stimulus.

The euro fetched $1.21915, bouncing back from its three-week low of $1.2104 set on Friday while the dollar eased to 109.26 yen, losing steam after having hit a two-month high of 110.325 late last week.

The dollar’s index against a basket of six major currencies stood at 90.021, not far from 89.533, a 4 1/2-month low touched late last month.

“It’s not that the payrolls numbers were weak. But because so much expectation had been build up in advance, the dollar suffered a bit of setback,” said Shinichiro Kadota, senior currency strategist at Barclays.

Friday’s jobs data, which showed U.S. non-farm payrolls increasing by 559,000 in May, fell 90,000 jobs short of expectations.

The data helped to pin down U.S. bond yields near their recent lows, weighing on the dollar, while investors now looked to consumer price data on Thursday for fresh direction.

Many investors now expect the Fed to unveil a plan to reduce its bond purchase later this year, and actual tapering to start early next year.

The British pound hardly budged at $1.4169 while the Australian dollar was unchanged at $0.7753, both stuck in ranges seen over the past couple of months.

With recent trading ranges tight, implied volatilities on both currencies have dropped to their lowest levels since early 2020, before markets were pummeled by the COVID-19 pandemic.

Elsewhere, the Mexican peso held firm at 19.832 to the U.S. dollar, near its highest level since late January, after midterm elections confirmed President Andres Manuel Lopez Obrador’s MORENA party as the strongest force in the country, but with a reduced majority.

In contrast, the Peruvian sol tumbled to an all-time low of 3.9367 per dollar as socialist Pedro Castillo edged ahead of right-wing rival Keiko Fujimori in the country’s presidential election vote.

Cryptocurrencies were also little moved. Bitcoin traded flat at $33,564, while ether stood at $2,581.

Dollar edges up, recovering from jobs miss

The dollar edged up as European markets opened on Monday, recovering from Friday’s drop on U.S. jobs data which was below expectations.

The jobs data was seen as a relief for markets because it showed a pick-up in job growth was not strong enough to raise expectations for the U.S. Federal Reserve to tighten its monetary policy any sooner, hurting the dollar.

There was little risk appetite in currency markets in early trading, as equities dipped amid caution in global markets ahead of U.S. inflation data and the European Central Bank meeting, both on Thursday.

At 0715 GMT, the dollar index was up 0.2% on the day at 90.283. The euro was down 0.2% against the dollar, at $1.21465.

The Australian dollar, which is seen as a proxy for risk appetite, was 0.2% lower at 0.7727.

Dovish rhetoric from ECB policymakers suggests the bank is in no hurry to slow the pace of buying under the 1.85 trillion euro ($2.24 trillion) Pandemic Emergency Purchase Programme (PEPP).

Meanwhile U.S. Federal Reserve policymakers have begun inching toward a discussion about winding that help back.

“A divergence has opened up recently between the ECB and Fed who have signalled a willingness to discuss QE tapering at upcoming meetings,” MUFG currency analyst Lee Hardman wrote in a note to clients.

“It will help dampen upward momentum for EUR/USD. However, the developments are not sufficient to alter our bullish outlook the pair beyond the near-term.”

Speculators decreased their net short dollar positions in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.

China’s yuan hovered around the key 6.40 level, with the offshore yuan changing hands at 6.3961 at 0732 GMT.

China’s export growth missed forecasts, while imports grew at their fastest pace in 10 years in May, fuelled by the surging demand for raw materials, data on Monday showed.

“In general, the trade sector continues the strong performance indicating that the manufacturing sector remains the leading role in the post-pandemic recovery,” wrote Commerzbank senior economist Hao Zhou in a note.

“However, the trade data might have little FX market impact, as the authorities vow to keep a stable currency for the time being.”

Elsewhere, the United States, Britain and other large, rich nations reached a landmark deal on Saturday to squeeze more money out of multinational companies such as Amazon and Google and reduce their incentive to shift profits to low-tax offshore havens.

While investors were wary of how tech stocks would react, in terms of currency markets, ING strategists wrote in a note to clients that the plans for a minimum global corporate tax rate of at least 15% could result in a repatriation of global capital over a longer term which would be positive for the dollar.

“Our thoughts here are that the removal (of) tax havens could have implications for the hundreds of billions of dollars of cash parked overseas by US multi-nationals – reducing the incentives to keep cash overseas,” they said.

In cryptocurrencies, Bitcoin was up 1% around $36,166, while ether was up 2% at $2,766. Both were trading within the month’s relatively narrow ranges.

Dollar jumps as strong run of data turns all eyes to payrolls

The dollar was perched near multi-week highs on Friday, basking in its biggest gains in about a month after robust jobs data threw investors’ focus on to the strength of the U.S. recovery and on the possibility of it driving policy tightening.

The next test comes later in the day when U.S. non-farm payrolls data is published. The Street’s consensus forecast is for about 650,000 jobs to have been added in May, though the “whisper number” among traders is higher, closer to 800,000.

Private payrolls — a bit of an unreliable guide — delivered a big beat overnight with an increase of 978,000, against forecasts of 650,000, which sent the dollar rallying.

It lifted 0.7% to a three-week high of $1.2118 per euro and rose by the same margin to a two-month high of 110.32 yen. Gains topped 1% against the Aussie and the kiwi, which fell from recent ranges to their lowest in weeks.

China’s offshore yuan softened past 6.4 per dollar in early Asia trade, while other moves were only slight as markets now await the payrolls figures, due at 1230 GMT, with options trade showing it is expected to trigger volatility.

“Clearly traders are covering dollar shorts into the jobs data,” said Chris Weston, head of research at brokerage Pepperstone in Melbourne.

He reckons, as a rough guide, that a million or more jobs might see the Aussie fall by another 1%, the euro drop about 0.8% and the dollar/yen exchange rate gain that amount as traders factor in a policy response to the strong economy.

“Between 250k-500k jobs and we’ll potentially see dollar/yen fall 0.6% to 0.8%,” Weston said. “A number in line will not give us much to work with, so the moves in the market will be dictated by the broad quality of factors – revisions to the April print of 266k, the unemployment rate, hourly earnings.”

At issue is whether the figure points to the sort of hiring that could reel in pandemic job losses, lift wages and drive broad U.S. growth that increases the trade deficit and weighs on the dollar – or whether things feel like they are overheating.

Positioning data shows investors heavily short dollars, leaving the market hypersensitive to any suggestion of a change in direction for the currency or a shift in the rates outlook – hence the options market is priced for a bumpy ride.

Overnight implied dollar/yen volatility shot up to a month high above 8% on Thursday and euro/dollar implied volatility hit its highest since mid-March.

Brian Daingerfield, head of G10 currency strategy at Natwest, sees a payrolls print around 550,000 as the “goldilocks” number: “strong enough to keep the recovery going but not strong enough to pull tapering fears forward.”

That could weaken the dollar broadly, he said, offsetting Thursday’s moves, while bonds could recover lost ground. Benchmark ten-year U.S. Treasury yields rose 3.6 basis points to 1.6300% overnight and opened near that level in Tokyo on Friday.

The U.S. dollar index, which measures the greenback against a basket of six major currencies, rose 0.7% on Thursday to stand at a three-week high of 90.574 on Friday.

The Australian dollar was licking wounds at $0.7652, after falling to its lowest since mid-April overnight, while the kiwi was parked at $0.7136 after slipping to its cheapest since early May on Thursday.

Sterling was steady at $1.4099 in Asia after dropping through its 20-day moving average as the dollar climbed. The yuan fell to 6.4014.

Cryptocurrencies held on to several days of gains to leave bitcoin at $38,737 and on course for its best week in a month.