Dollar dips as Powell remains cautious before CPI data

July 9, 2024 9:05 PM EDT

FILE PHOTO: U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Karen Brettell

(Reuters) -The dollar dipped on Wednesday after Federal Reserve Chair Jerome Powell indicated that the U.S. central bank is getting closer to cutting interest rates but wants to see further declines in inflation.

It comes before consumer price index (CPI) data on Thursday is expected to show that headline prices eased on an annual basis in June.

Powell is "still interested in seeing some more trends and I think we're going to have to see with CPI," said Paula Comings, head of foreign exchange sales at U.S. Bank in New York. "He's continuing to hedge his bets and be very fair and balanced."

Economists polled by Reuters expected Thursday's report to show that headline prices rose 0.1% on the month, while core prices gained 0.2%. That would put annual gains at 3.1% and 3.4%, respectively.,

Powell said on Wednesday he was not ready to conclude that inflation is moving sustainably down to 2% though he has "some confidence of that."

His comments on his second day of testimony before Congress largely mirrored those made on Tuesday, when he also acknowledged the cooling labor market and noted that "we now face two-sided risks" in the economy.

“Powell took a relatively cautious approach,” said Karl Schamotta, chief market strategist at Corpay in Toronto. “But there were enough dovish hints within his narrative to help risk appetite improve in markets.”

“The idea that the labor market is no longer generating the inflation pressure that the U.S. economy was struggling with, and that the Fed was trying to counteract, is helping to reduce the likelihood of further rate hikes and also put a September rate cut more firmly on the table,” Schamotta said.

Traders now have around 73% odds for a rate cut by September, with a second cut also seen likely by December, according to the CME Group’s FedWatch Tool.

The dollar is expected to weaken when the Fed begins cutting rates but traders are in no rush to fully price in such a move until it appears more certain, especially as U.S. interest rates remain above peers.

"It just goes back to the divergence," said Comings, noting that any dollar weakness will also depend on the pace and level of rate cuts, or hikes, by other central banks.

The dollar index, which measures the U.S. currency against six others including the euro and yen, was last down 0.07% at 105.05.

The euro gained 0.1% to $1.0823 as investors came to terms with a hung parliament in France.

The unexpected outcome of the snap election, in which the left benefited from a surprise surge but no group won an absolute majority, has plunged France into uncertainty, with no obvious path to a stable government.

The dollar strengthened 0.29% to 161.77 Japanese yen, getting closer to a 38-year high of 161.96 reached last week.

The Japanese currency has suffered from the wide differential between U.S. and Japanese interest rates.

Many Japanese private banks who met with the Bank of Japan on Tuesday called for the central bank to halve its monthly bond purchases by around 2026, two officials with direct knowledge of the deliberations told Reuters.

The findings will be taken into account when the BOJ finalizes its taper plan at its policy meeting on July 30-31.

Sterling hit a four-week high after Bank of England Chief Economist Huw Pill said on Wednesday the central bank was moving closer to cutting interest rates but services price inflation and wage growth remained uncomfortably strong.

It was last up 0.48% at $1.2842 and earlier reached $1.2847, the highest since June 12.

Meanwhile, the kiwi dropped after the Reserve Bank of New Zealand opened the door to possible rate cuts should inflation slow as expected.

The RBNZ, which held rates steady as widely expected, expressed confidence that inflation would return to its target band this year, spurring bets for early policy easing.

At the previous meeting in May, policymakers had flagged the potential for an additional rate hike.

The New Zealand currency was last down 0.75% versus the greenback at $0.6077.

In cryptocurrencies, bitcoin fell 0.57% to $57,584.

(Reporting By Karen Brettell; Additional reporting by Amanda Cooper and Kevin Buckland; editing by Diane Craft)

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