By Rae Wee
SINGAPORE (Reuters) – The dollar weakened on Tuesday after Federal Reserve officials signalled that the central bank was nearing the end of its tightening cycle, although it traded in a tight range ahead of a key U.S. inflation report.
Several Fed officials said on Monday the central bank will likely need to raise interest rates further to bring down inflation but the end to its current monetary policy tightening cycle is getting close.
The comments knocked the greenback to a two-month low of 101.71 against a basket of currencies in Asia trade, as traders pared back their expectations about how much further U.S. rates may have to rise.
U.S. interest rate expectations have been a key driver of the dollar since the Fed began its tightening cycle last year.
Sterling hit a 15-month high of $1.28875, while the euro climbed to a two-month peak of $1.1022.
“The FOMC speak was the main focus of yesterday and officials who spoke reiterated the recent message that a couple more rate hikes are likely in coming months, so not really a surprise there,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:).
Markets are now focusing their attention on U.S. inflation data due out on Wednesday, which will provide more clarity on the progress the Fed has made in its fight against stubbornly high consumer prices.
A survey from the New York Federal Reserve on Monday showed waning near-term inflation expectations among Americans, who said last month they were expecting the weakest near-term inflation gains in just over two years.
“If we do get a strong CPI report (tomorrow), that may help market pricing for a second rate hike from the FOMC (after July) and drive the dollar a little bit higher,” said Kong. “But I don’t think any upside will be material given the fact that we are near the top of the FOMC tightening cycle.”
In Asia, the yen was among the biggest gainers, strengthening past 141 per dollar for the first time in nearly a month and last trading at 140.77.
The yen has risen roughly 3% from a seven-month low touched last month, when it weakened past the closely watched 145 per dollar level that put traders on high alert for possible intervention from Japanese authorities.
“(The yen) started to stall earlier on, close to 145, and that’s because there were concerns about FX intervention,” said Bank of Singapore currency strategist Moh Siong Sim.
He said rising Japanese government bond yields, alongside a weaker dollar, have also contributed to the stronger yen.
“The market is starting to wake up again to the idea that there is a (Bank of Japan) policy risk going into the July meeting … Given the rising inflation backdrop in Japan, the market is starting to become more wary that perhaps a policy tweak could come.”
Elsewhere, the Australian dollar rose 0.14% to $0.6686, while the New Zealand dollar steadied at $0.6210.
The offshore edged higher, last trading at 7.2048 per dollar, with sentiment underpinned by an extension of financial policy support from China’s central bank to the country’s beleaguered property sector.
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