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The dollar edged lower on Monday, paring some of the gains made in the wake of strong US inflation data that bolstered bets the Federal Reserve will raise interest rates this year.
The dollar index, which measures the greenback’s value against a basket of six major currencies, fell 0.2 per cent to 95.888. On Friday, it had touched 96.108, its strongest level since September 1.
US consumer prices
US consumer prices rose more than expected in August, data on Friday showed, pointing to a steady build-up of inflation that could allow the Fed to raise interest rates this year.
US short-term interest rate futures are now implying a 55 per cent chance of the Fed raising interest rates by December, compared to around 47 per cent before the CPI data, according to CME Group’s FedWatch Tool.
The implied probability of the Fed raising interest rates at its policy meeting this week remains low, at 12 per cent.
It remains to be seen whether the US central bank will manage to raise interest rates by December without triggering a bout of dollar strength, said Teppei Ino, an analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.
“That will test its (the Fed's) skill and will hinge on how they communicate,” Ino said.
A rise in the dollar can increase disinflationary pressures on the US economy, a point touched upon recently by a Fed policymaker.
Fed Governor Lael Brainard had said last Monday that low interest rate policies across advanced economies could make the United States more vulnerable to spikes in the value of the dollar, which could put downward pressure on inflation.
The euro edged up 0.1 per cent to $1.1166, having touched a low of $1.1149 earlier on Monday, its lowest level since September 6.
The dollar eased 0.2 per cent against the yen to 102.02 in holiday-thinned trading, as Japanese markets were closed for a public holiday.
All eyes this week will be on the policy meetings by the Fed and Bank of Japan on September 20-21.
BOJ policy review
The BOJ is due to conduct a comprehensive review of its current policy framework that combines negative interest rates with a massive asset-buying programme.
Unless the BOJ surprises by adopting some form of radical policy easing, the yen will probably strengthen after its meeting, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
“Unless they were to say that they will buy foreign bonds or something like that, the yen will probably rise,” Okagawa said.
Asset purchases
The BOJ is seen as highly unlikely to resort to foreign bond purchases, especially since the finance ministry has jurisdiction over currency policy, meaning the BOJ cannot buy foreign bonds in any way that influences exchange rate moves.
Sterling edged up 0.3 per cent to $1.3038 on Monday, getting a bit of reprieve after falling 1.8 per cent on Friday.
Brexit negotiations
With Britain's parliament back in session and focus returning to the uncertainty surrounding the UK’s negotiations to leave the European Union as well as the prospect of further easing by the Bank of England, sterling has retreated after hitting a seven-week high of $1.3445 in early September.
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