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Dollar Hovers Near Two-Week Low Ahead of U.S. Inflation Data

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The dollar remained steady near a two-week low on Thursday as investors awaited U.S. inflation data that would impact the Federal Reserve’s next policy decisions. This comes after the release of minutes from the Fed’s last meeting, which revealed a cautious stance among policymakers.

The dollar index, which measures the U.S. currency against six other major currencies, was at 105.63, showing little movement throughout the day. However, it was not far from 105.53, its lowest level since September 25.

The euro and yen also maintained stability against the dollar, with the euro at $1.06245 and the yen at 149.13 per dollar. The lack of major movement can be attributed to the anticipation of the upcoming inflation figures.

The U.S. consumer price index data for September, expected to show a moderation in inflation last month, is due to be released at 1230 GMT.

Carol Kong, a currency strategist at Commonwealth Bank of Australia, suggested that if inflation turns out to be lower than expected, it would support the case for the Fed to have completed its tightening cycle. This would result in a decline in U.S. Treasury yields and the dollar. On the other hand, if inflation exceeds expectations, it would increase the likelihood of a 25 basis point hike by the Federal Open Market Committee.

Futures markets are currently pricing in a 26% chance of a 25 basis point hike by the Fed’s December meeting, while there is only a 9% chance of a similar rise at the central bank’s next meeting in November, according to the CME FedWatch tool.

The recent weakness of the dollar can be attributed to declining Treasury yields as bond prices rallied due to the Fed’s softer stance on future rate hikes. It’s worth noting that bond yields move inversely to their price, hence the impact on the dollar.

The yield on 10-year Treasury notes saw a slight decrease, standing at 4.575%. Last week, it reached its highest level since 2007 at 4.887%, but has since dropped by around 20 basis points this week.

Another factor in the currency market on Thursday was sluggish British growth figures. The data showed that the UK economy partially recovered in August after a significant decline in July. The pound initially did not react, but later fell by 0.16% to $1.2295.

The pound had been the best-performing G10 currency in the first half of the year due to positive economic data and higher-than-expected inflation, which led to expectations of longer rate hikes by the Bank of England compared to other central banks. However, it experienced its worst month in a year in September as these factors reversed. It has since stabilized this month.

Nick Rees, FX market analyst at Monex Europe, stated that without a pickup in growth, inflation is likely to continue cooling and a final rate hike by the Bank of England this year seems risky given the current economic weakness. The foreign exchange market seems to share a similar view.

The release of Thursday’s CPI data follows Wednesday’s mixed report on U.S. producer prices and the minutes from the Fed’s September meeting. The minutes revealed that Fed officials pointed to uncertainties surrounding the economy, oil prices, and financial markets as factors supporting a cautious approach to further policy tightening.

In other currency news, the Swiss franc saw a slight increase in value on Thursday, standing at 0.90155 against the dollar. This marks its seventh consecutive day of gains, the longest streak since July 2020.

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