Dollar firm as U.S. inflation poses next test

The dollar made a steady start to the week on Monday but was kept below Friday peaks, as currency traders seek a path between markets’ volatile interest rate projections and central bankers vowing to keep rates low even as inflation surges.

Figures due Wednesday are expected to show U.S. consumer price growth running hot at 5.8% year-on-year, the next big test of faith in the Federal Reserve’s insistence it will be patient with interest rate hikes.

In early Asia trade, the dollar was marginally higher against the yen and crept from a one-week low to 113.49 yen.

After briefly touching a 15-month top of $1.15135 on the euro in the wake of strong U.S. labor data on Friday, the greenback steadied at $1.1566 per euro.

Sterling, which was walloped when the Bank of England surprised traders by holding rates steady last week, fell to a five-week low of $1.3425 on Friday, before bouncing to hold at $1.3487 on Monday.

The Bank of England’s surprise triggered a sharp reversal late last week in what had become quite aggressive bets on imminent rate hikes in Britain and globally, while stocks have meandered higher through the maelstrom in bond markets.

“Central banks have distorted a whole lot of markets, pumping up the equity market and pumping up the bond market,” said Jason Wong, a strategist at Bank of New Zealand in Wellington.

“Currencies are sort of in the middle of all that, wondering what the hell’s going on,” he said, with the market seemingly in a holding pattern but with risks building up, especially in China where a slowing economy brings global implications.

The risk-sensitive Australian and New Zealand dollars struggled to make much headway in early trade, with the Aussie pinned just below $0.74 and the New Zealand dollar around $0.7108.

“AUD/USD risks remain skewed to the downside this week in our view,” said Kim Mundy, an analyst at Commonwealth Bank of Australia, especially if U.S. inflation data is strong or if Australian employment data on Thursday is particularly weak.

“A dip towards $0.7300 is possible,” she said.

Elsewhere, weekend data showed Chinese exports unexpectedly strong, but imports unexpectedly soft in another indicator of underwhelming demand, especially as China tightens movement restrictions to keep a lid on Covid-19.

The Communist Party begins a meeting on Monday which is expected to pass a resolution in praise of President Xi Jinping and lay the groundwork for a third term of his leadership.

Traders are also looking ahead to Chinese producer and consumer price data due on Wednesday, with annual producer price growth seen surging to 12% in perhaps a harbinger of further price pressure to come through global supply chains.

The Chinese yuan was marginally weaker in early trade at 6.3951 per dollar. The U.S. dollar index was flat at 94.225, putting it roughly in the top half of a range it has traded for a little more than a month.

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