Dollar index back above 100 ahead of expected red-hot U.S. inflation data

The dollar index was back above 100 on Tuesday morning, supported by high U.S. yields ahead of inflation data that is expected to show U.S. prices gained the most in over 16 years, reinforcing expectations of aggressive Fed tightening policy.

The index stood at 100.11, testing last week’s near two-year high of 100.19.

The dollar’s gains have been most striking against the yen, and it was trading choppily at 125.47 yen on Tuesday morning, just off the overnight intraday high of 125.77, when it neared its June 2015 peak of 125.86. A move past that level would take the dollar to its highest against the yen since 2002.

Japanese Finance Minister Shunichi Suzuki on Tuesday declined to comment on specific prices in foreign exchange markets, but said excess volatility and disorderly movements could have an adverse effect on the economy and financial stability.

The dollar also gained steadily overnight on the offshore Chinese yuan, and reached a two-week high of 6.390 in early trade.

The dollar’s strength “was most apparent against JPY and CNH – currencies of economies with a dovish central bank,” said analysts at CBA in a morning note.

The Bank of Japan has repeatedly intervened to keep benchmark bond yields around zero.

CBA analysts said they expected very high U.S. inflation would reinforce expectations of aggressive Federal Reserve tightening. They said that because a 50 basis point rate hike was not yet fully priced in for each of the next two Fed meetings, they expect further gains for the dollar.

“We expect the dollar to stay bid and lift to the pandemic high of 103 pts in coming months.”

U.S. consumer prices likely increased by the most in 16-1/2 years in March, according to a Reuters poll of economists as the war in Ukraine boosted the cost of gasoline to record highs.

Meanwhile U.S. longer term yields continued their march higher.

The yield on benchmark 10 year notes rose to 2.836%, its highest since December 2018. If Tuesday’s early advance holds it would be the eighth straight session of gains for benchmark yields.

The yield on the 30-year Treasury bond rose to 2.86%, its highest since May 2019.

Elsewhere, the euro was unable to hold onto gains from its mini-relief rally on Monday after French leader Emmanuel Macron beat far-right challenger Marine Le Pen in the first round of presidential voting.

It was last at $1.087 little changed from its Friday close.

“The bottom line, then, is that we are where we were before yesterday’s vote,” said Rabobank analysts.

“Macron looks set to return to office following the April 24 vote but the scale of his victory is likely to be far smaller than when he was seen as an upstart five years ago and likely slim enough that the political earthquake that would be a Le Pen victory cannot be entirely discounted.”

The Australian dollar was on the back foot at $0.7403, as lower oil prices weighed on the commodity-linked currency. The New Zealand dollar was also lower at $0.6807, ahead of a closely watched meeting by the Reserve Bank of New Zealand at which a 50 basis point rate hike is on the cards.

Sterling inched lower to $1.30155.

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