FOREX-Dollar sellers hit pause for US inflation data

The dollar found support after a bumpy few days ‌and ​held firm on Tuesday ahead of US inflation data that could lift it further if rate hike bets strengthen. A tumble in oil prices and gains for stocks had knocked the dollar lower as investors turned to riskier assets.

The trade- ‌and sentiment-sensitive Australian dollar rose by nearly 1% through Monday to sit at $0.6918 on Tuesday and the New Zealand dollar gained even more, reaching $0.5634, with both spending the Asia session fairly steady. The kiwi caught an extra boost as results from last weekend's election suggested the incumbent three-party coalition would stay in power, reducing uncertainty and the likelihood ‌of any changes to the central bank's mandate.

The euro jumped 0.7% on Monday to $1.1220, reversing a Friday fall when strong US jobs data lifted the dollar ‌and interest rate expectations. That has put the euro/dollar pair roughly into the middle of a range it has held for a month. Traders favour further dollar strength and the dollar index has gained this year as early expectations for US interest rate cuts quickly turned to bets on hikes after the US-Israeli war on Iran drove up energy prices and fuelled inflation.

A blowout October jobs report on Friday, ⁠with hiring ​more than twice the forecasts, has markets pricing ⁠an 85% chance of a Federal Reserve rate increase next month. US CPI AWAITED

Headline inflation is seen picking up to 3.9% and core to 2.8%, year-on-year, in October, according to economists polled by Reuters, so ⁠anything hotter than that will add to rate hike expectations and probably lift the dollar, analysts said. "You can only put a little bit more (in the price) in December, but the ​price for meetings into the future could go higher," said Imre Speizer, strategist at Westpac in Auckland.

Markets have priced two US hikes by the ⁠middle of next year, though the outlook has dimmed somewhat amid the recent turbulence in AI stocks on fears a Democratic sweep of Congress could lead to tighter regulation and slow the AI boom. "This could ⁠be ​a factor that slows US growth in 2027 and helps put a top in for the dollar," said Macquarie strategists Thierry Wizman and Gareth Berry in a note to clients.

Sterling, which has drawn support since the Bank of England hiked interest rates for the first time in three years last week, sat in the ⁠middle of a range it has traded in for almost a year and a half at $1.3441. Japan's yen hovered at 158 per dollar, having been the best-performing G10 ⁠currency against the greenback over the past six ⁠months on the back of heavy official intervention.

Figures released on Monday showed Japan sold $97 billion in reserves defending the yen through late July and August as it traversed four-decade lows on the dollar. The threat of further dollar sales is ‌keeping the currency steady, even ‌as expectations for a December rate hike in Japan have lately faded.