Dollar steady ahead of key US inflation data, yen retraces gains

The US currency advanced around 0.2% to 147.36 against the yen

TOKYO (Reuters) - The dollar was broadly steady on Wednesday ahead of a key US inflation report later in the day, though it rose on the yen as traders assessed comments from Japan’s top central banker on a possible early exit from its negative interest rate policy.

The US currency advanced around 0.2% to 147.36 against the yen, which retraced its biggest one-day percentage rise in two months on Monday, following the remarks from Bank of Japan (BOJ) Governor Kazuo Ueda over the weekend.

As investors have more time to consider Ueda’s comments, “the fundamental driver of the upside pressures on yen” have returned, said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

“I think the market also is reading the statement more carefully. The statement to our mind was quite a conditional one, (Ueda) didn’t promise anything.”

Influential ruling party lawmaker Hiroshige Seko on Tuesday also signalled his preference for ultra-loose monetary policy, after Ueda’s comments pushed up the yen and bond yields.

The yen has been under relentless pressure against the dollar as the BOJ remains a dovish outlier among global central banks, especially since the Federal Reserve began its aggressive rate-hike cycle in March 2022.

In the broader currency market, the dollar stood firm, though moves were subdued as traders stayed on guard ahead of the closely-watched US inflation reading out later on Wednesday.

Sterling slipped 0.01% to $1.2482, while the Australian dollar fell 0.04% to $0.64015.

The US dollar index measure against a basket of key rivals was last steady at 104.67, after slipping to a one-week low on Monday and clocking its largest daily fall in two months.

Analysts attributed the slide to an unwinding of long dollar positions, after a recent run of resilient US economic data boosted the greenback.

Wednesday’s US consumer price index (CPI) data for August comes just a week before Federal Reserve officials gather to decide on interest rate policy.

While the central bank is largely expected to keep rates on hold at next week’s meeting, according to CME’s FedWatch Tool, the Fed’s next move in November remains more uncertain.

“I think there is a chance for the Fed to raise interest rates another time this year,” said Tina Teng, market analyst at CMC Markets.

Elsewhere, the euro ticked down 0.07% to $1.0745, after hitting a one-week high of $1.0777 in the previous session as markets raised their bets of further rate hikes from the European Central Bank (ECB) ahead of its monetary policy decision.

A Reuters report said the ECB expects inflation in the 20-nation euro zone to remain above 3% next year, bolstering the case for a tenth consecutive interest rate increase on Thursday.

“In recent months, European inflation, core inflation in particular, has fallen more slowly than expected. This has given the ECB some serious headaches,” said analysts at Rabobank in a note.

“The high inflation rate warrants another rate hike, but the economic indicators … signal that a recession is imminent.”