Dollar hovers above 5-month low, FX volatility drops further ahead of ECB, U.S. inflation data

LONDON (Reuters) – The dollar hovered above a five-month low versus major peers on Thursday as investors looked to U.S. inflation data and a European Central Bank meeting later in the day, while an index of volatility among major currencies dropped to new lows.

FILE PHOTO: U.S. dollar notes are seen on a desk at a currency exchange booth in Karachi, Pakistan December 3, 2018. REUTERS/Akhtar Soomro

Investors have adopted a wait-and-see attitude all week, sucking volatility from the market and leaving major currencies mostly range-bound.

The dollar index has fluctuated narrowly around the psychologically important 90 level, and was last at 90.206 – not too far from last month’s low of 89.533, a level not seen since early January.

The euro rose to a one-week high at $1.2218 on Wednesday only to finish little changed, and was mostly flat at $1.2169 in European trade.

The yen traded at 109.46 per dollar, also little changed from Wednesday and near the middle of the 109.19-110.325 range of the past two weeks.

Deutsche Bank’s Currency Volatility Index, which hit its lowest level since February 2020 earlier this week, sank even further to a new low.

The U.S. Labor Department’s consumer prices data has been much anticipated after last month’s report showed consumer prices increased by the most in nearly 12 years in April.

That has stoked bets that higher prices could last longer than some anticipate, potentially calling into question the Federal Reserve’s insistence that current inflation pressures are transitory and monetary stimulus should stay in place for some time yet.

Economists polled by Reuters estimated the CPI advanced 0.4% in May.

“Ahead of the print, our economists are expecting an above-consensus reading for both the headline and the core inflation print,” said Valentin Marinov, head of G10 FX reserach at Credit Agricole.

If realised, that could trigger intraday volatility and a reversal of some of the latest drop in U.S. Treasury yields, Marinov said.

“The dollar could benefit as a result across the board, especially if the print is seen as potentially resulting in a more hawkish or less dovish outcome of the June FOMC (Federal Open Markets Committee) meeting next week.”

While the greenback has kept to tight ranges in the run-up to the CPI report, benchmark 10-year Treasury yields – which helped drive the dollar index to a multi-year high earlier this year – have taken a sizeable step lower in the past week and were at 1.5025% in Europe from as high as 1.6350% on Friday.

With the ECB, investors will be watching for any clues of an imminent slowdown to its bond-buying program.

While the ECB is widely expected to keep policy settings steady, the euro could be sensitive to changes in the bank’s economic forecasts or any signal that the pace of bond buying could be reduced in the months ahead.

“We expect the ECB to avoid any tapering talk, but given that this has already been communicated by ECB officials, this should not come as a surprise to markets and in turn, should have a limited impact on the euro,” said ING strategists in a note.

“Given the expectations of no change in guidance on asset purchases, the balance of risks is modestly skewed to a higher euro, should the press conference not reiterate the ‘tapering on hold’ message strongly enough or deliver some communication missteps.”

In crypto markets, bitcoin held gains from its biggest rally in four months on Wednesday, when it jumped nearly 12%.

It last traded slightly higher at $38,160, after rebounding from a three-week low of $31,025 hit on Tuesday when signs of institutional investor caution and regulatory attention drove selling.

The best-known digital token has struggled since reaching a record $64,895.22 in mid-April.

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