The
safe-haven dollar edged higher on Tuesday, erasing earlier losses as risk
appetite dwindled ahead of key inflation figures that could offer clues on how
aggressive the Federal Reserve will be in its expected interest rate hike in
September.
The dollar
index , which measures the currency’s value against a basket of peers, was up
0.047% at 106.38 at 3:15 p.m. Eastern time (1915 GMT).
The
greenback had drifted lower in thin summer trading from the start of the
session, but then reversed course as U.S. stock markets slid on profit
warnings, global inflationary concerns, and data that showed U.S. worker
productivity fell sharply in the second quarter
“There’s a
lot of global issues and we cannot ignore them and that puts a lot of downward
pressure on global growth,” Juan Perez, director of trading at Monex USA said
of the dollar’s safe haven appeal.
The big
focus for traders is on Wednesday’s U.S. Consumer Price Index report, which is
expected to show that decades-high inflation eased in July following
back-to-back 75-basis point hikes by the Fed in June and July
But data on
Friday showed that U.S. employers hired far more workers than expected last
month, with wages still rising at a strong clip, boosting bets for another
mammoth rate hike by the Fed at its Sept. 20-21 meeting.
Money-market
futures show traders see about a two-thirds chance of a 75 bps hike next month.
“We’ve been
getting consistently hotter-than-expected inflation reports and if that happens
again, the market is not prepared for that,” said Edward Moya, senior market
analyst at Oanda. “If that happens, we’re testing parity again against the
euro,” he said of the potential for more dollar strength.
The euro
was up 0.2% at $1.0204, sterling dipped 0.12% to $1.2065. Versus the yen, the
dollar was fell0.14 at 135.195 yen .
Economists
polled by Reuters see year-on-year headline inflation (USCPNY=ECI) at
8.7% – relatively high, but below last month’s 9.1% figure. The Fed targets
inflation at 2%.
Heightened
expectations for aggressive near-term hikes, have pushed short-dated Treasury
yields further above long-term peers.
The gap
between two and 10-year Treasury yields , a reliable recession indicator, has
grown to its largest in two decades.
“The U.S.
yield curve is inverted, suggesting recession down the line. But equity markets
look as if they believe the Fed is going to stop soon and start cutting in
2023,” said Mizuho senior economist Colin Asher.
“I think
tomorrow’s CPI data will suggest the Fed is not going to stop, which to me
suggests weaker equity markets ahead which will limit any dip in the dollar in
the next few months.”
The
dollar’s safe haven status, though, makes the
greenback’s
reaction a little harder to predict, especially as growth and geopolitical
worries swirl.
China
extended military drills near Taiwan, and the self-ruled island’s foreign
minister said China was using the drills launched in protest against U.S. House
Speaker Nancy Pelosi’s visit as an excuse to prepare for an invasion.
Elsewhere,
Australia’s dollar, viewed as a barometer of market risk, dropped 0.41% to
$0.6955 and New Zealand’s dollar slid 0.14% to $0.62765 .
(Source
REUTERS )