The dollar is strengthening in anticipation of Fed guidelines

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Author: Saqib Iqbal Ahmed

NEW YORK (Reuters) – The dollar strengthened against the euro on Monday as investors awaited further guidance on the path of U.S. interest rates following cautious comments from Federal Reserve officials even as inflation showed signs of cooling.

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Federal Reserve officials are not ready to say inflation is headed to the U.S. central bank’s 2% target after last week’s data showed a welcome easing of pressure on consumer prices in April, and several on Monday called for further caution on policy.

Atlanta Fed President Raphael Bostic said Monday that the Federal Reserve will have confidence that inflation is returning to target.

“The issue now is when will we be sure that inflation is clearly returning to 2%. “I think it will be a while before we know for sure,” Bostic said in an interview on Bloomberg Television.

In a speech at the Mortgage Bankers Association conference in New York, Fed Vice Chairman Philip Jefferson said it was too early to tell whether the recent slowdown in disinflation would be indefinite.

The euro lost 0.05% against the dollar, reaching $1.0863. Against the yen, the dollar rose 0.4% to 156.26 yen.

Data last week showed U.S. consumer prices rose less than expected in April, leading markets to price in 50 basis points of Fed rate cuts this year.

With little economic data on the calendar for the day, most major currency pairs remained within narrow trading ranges on Monday.

“I think after last week’s CPI decline, the currency market is pretty much lacking a catalyst at this stage,” said Michael Brown, a market analyst at online broker Pepperstone in London.

“While the FOMC (Federal Open Market Committee) calendar is once again extremely busy, it appears there is little fresh information for speakers to add at this stage, especially given the well-labelled reaction function, another hike all but ruled out, and at least some more encouraging inflation data needed to provide the necessary certainty that inflation will return to 2% before the first cut can be made,” Brown said.

Survey-based indicators for the economies of the euro zone, Germany, Britain and the United States will be published this week.

The euro remains not far from the nearly two-month high of $1.0895 it hit last week. It has risen 1.8% so far in May, helped by a decline in the dollar due to weaker economic growth and inflation data in the US, as well as a recovery in the euro zone economy.

As the Japanese yen was weaker that day, investors continued to watch for signs of government intervention. The currency has traded in tight ranges over the past few trading days after a turbulent start to May amid suspicions of rounds of currency interventions by Tokyo to support the yen.

Sterling rose 0.07% on the day to $1.2711 after hitting a two-month high of $1.27255 ahead of the UK inflation report due on Wednesday.

The Australian dollar fell 0.3% to $0.6671. Inflation rose by 3% this month amid high inflation in Australia. Monday’s weakness in the commodity-linked currency despite powerful commodity prices bodes ill for the Australian dollar’s near-term prospects, Pepperstone’s Brown said.

“(Weakness) on a day when commodity prices are rising and stocks are solid enough is perhaps a canary in the coal mine for the Antipodean bulls,” Brown said.

In cryptocurrencies, bitcoin was 2.7% higher on the day at $68,715, a recent five-week high.

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