Karen Brettell
NEW YORK (Reuters) – The dollar hit a four-week high on Tuesday ahead of a long-awaited inflation report that is likely to influence the timing of the U.S. Federal Reserve’s first interest rate cut, while the euro is pressured by political uncertainty in the European Union.
Stronger-than-expected job growth and higher wage inflation in Friday’s U.S. jobs report for May raised concerns that inflation could remain flat amid continued robust economic growth, making the U.S. central bank less willing to cut interest rates in the coming months.
Traders have tempered expectations for the first U.S. interest rate cut in September, which now has about a 50-50 chance.
The U.S. Department of Labor is scheduled to release the Consumer Price Index (CPI) for May on Wednesday at 8:30 a.m. ET (6:30 p.m. GMT), hours before the end of the Fed’s final two-day policy meeting.
“I really think the Fed members will take it (CPI data) into consideration,” said Noel Dixon, senior macroeconomic strategist at State Street (NYSE:) Global Markets.
The U.S. central bank is expected to leave interest rates unchanged, but Fed policymakers will update economic projections commonly known as a “scatter plot.”
If inflation remains in line with expectations, Dixon expects the dots to indicate an expectation of two 25-basis-point rate cuts this year, compared to the median projection of three cuts in March.
“There may be some short-term weakening in the dollar, especially given the large movement we have seen in the euro/dollar exchange rate,” Dixon said.
However, “once the dust settles, I think we’ll be back to a history of relative monetary policy divergence and… that will continue to support the dollar for the rest of the year.”
Economists polled by Reuters expect headline consumer price inflation to fall to 0.1% from 0.3% last month, with underlying price pressures remaining steady at 0.3% from last month.
The stock was recently up 0.1% at 105.24, but has risen as high as 105.46, its highest level since May 14. The euro fell 0.2% to $1.0742, having previously hit $1.07195, its lowest level since May 2.
The single currency also lost ground on fears that gains by Eurosceptics in the European elections and the calling of early elections in France could complicate EU efforts to deepen integration.
It was predicted that Marine Le Pen’s National Rally would win the upcoming elections in France on Monday, but would not obtain an absolute majority.
Meanwhile, the Bank of Japan will end its two-day meeting on Friday, which economists say will cause the central bank to start reducing its monthly bond purchases.
The dollar was little changed against the Japanese currency that day at 157.03 yen.
The yen’s fall to a 34-year low of 160.245 per dollar in slow April triggered several rounds of official Japanese intervention amounting to 9.79 trillion yen.
In cryptocurrencies, bitcoin fell 3.53% to $67,200.27.
