Dollar Rose as Traders are Waiting for U.S. Inflation Data

The U.S. dollar benefited from emerging views the Federal Reserve is slowly but surely moving towards a discussion about tightening monetary policy. Traders are waiting for crucial U.S. inflation data this week. In a market heavily short dollars, even the mere proposal of tapering is enough to temper further selling. The greenback strengthened its position against the euro as well as yen on Wednesday. It held Wednesday gains in the Thursday early session.

The euro traded at $1.2185, and the yen at a one-week low of 109.20 per dollar. The British pound fell to a week low of $1.4150.

The greenback strength also affected its counterpart from New Zealand, and it bought $0.7275. On Wednesday, hints of a 2022 rate hike by the Reserve Bank of New Zealand pushed the kiwi as high as $0.7316.  The Australian dollar dropped to $0.7732. 

This week, Fed officials downplayed immediate concerns about inflation prompting a very predictable response. But influential vice chair Richard Clarida made a subtle shift in tone by acknowledging that the time to discuss policy changes might be approaching.

The U.S. dollar index added 0.4% on Wednesday, holding there on Thursday at 90.076.

Dollar and risk factors

The most recent fretting about inflation was triggered when data in mid-May showed April U.S. CPI running at an annual clip 4.2%-juiced by the low base of the pandemic year. But still well above forecasts for 3.6%. 

The yen, which is sensitive to U.S. rates movements and began the 2021 tumbling as yields leapt, spent May in its tightest range since December 2019, and excepting that month, its highest range in 45 years.

The kiwi rose 0.8% on Wednesday, as the central bank reinstated its rates outlook, projected rates rising from 0.25% currently to 0.49% by September 2022 and to 1.78% by June 2024. That briefly vaulted the country’s currency above 73 cents. It made the kiwi the fourth-best performing G10 currency in 2021 and a year-to-year date gain of 1.3% on the dollar.

The top performer is the Canadian dollar, with a 5% gain triggered by oil price rise and a hawkish central bank. Another top performer is the British pound, which is up 3.2% as Britain’s vaccination drive rekindles its economy.

The Norwegian crown also benefited from oil prices as well as a hawkish central bank. It is up 2.4% for the year to date.