FOREX-Dollar retreats ahead of US inflation data, yuan weakens on short-term rate cut

By Rae Wee

SINGAPORE, Jun 13 (Reuters) – The dollar was broadly lower on Tuesday but range-bound as investors bid ahead of key US inflation data due later in the day, just as the Federal Reserve starts its two-day monetary policy, remained cautious.

In Asia, the Chinese yuan fell to a six-month low after the central bank cut interest rates on short-term loans for the first time in ten months to restore market confidence and shore up the stalled post-pandemic recovery.

The onshore yuan bottomed at 7.1680 per dollar, its lowest since last November, and last traded at 7.1618.

Its offshore counterpart was last down 0.2% at 7.1709 per dollar, having weakened to a fresh six-month low of 7.1782 earlier in the session.

“China’s slowdown is partly due to policymakers’ intent to push ahead with structural reforms,” ​​analysts at ANZ said in a note.

“The monetary easing is just a temporary measure to bring about a soft landing of the traditional economy.”

The market’s attention now turns to the US Department of Labor’s CPI report, which is expected later Tuesday. It should show a slight slowdown in inflation in May and give the Fed leeway to interrupt its aggressive cycle of rate hikes when it announces its interest rate decision on Wednesday.

According to the CME FedWatch tool, markets are currently looking at a nearly 84% chance that the Fed will leave rates unchanged at this week’s meeting.

Those expectations kept risk sentiment elevated, keeping the US dollar near multi-week lows against the risk-sensitive Australian and New Zealand dollars.

The Aussie is up 0.23% to $0.6766 after hitting a one-month high of $0.6774 in the previous session.

The kiwi stabilized at $0.6126, not far from Monday’s high of $0.6153, the highest since May 24.

“If inflation is above consensus, then I think the market could give the Fed a bigger chance of a rate hike this week,” said Joseph Capurso, head of international and sustainable economics at the Commonwealth Bank of Australia.

“(But) I think the Fed probably won’t hike rates… and they’re going to sound a little dovish, and that’s going to push the US dollar back lower.”

Elsewhere, sterling rose 0.16% to $1.25315 after hitting a one-month high of $1.2600 on Monday on hawkish comments from Bank of England policymakers.

The euro peaked at $1.0792, its highest since May 24, with traders also focused on the European Central Bank’s interest rate decision on Thursday following its monetary policy meeting.

“A 25 basis point rate hike by the ECB at this week’s monetary policy meeting is considered a done deal,” said Jane Foley, head of FX strategy at Rabobank.

“The consensus is that the ECB is nearing the end of its rate-hike cycle, which means the market will be trying to gauge not only how much rates will rise, but also how long they’ll stay at their peak.”

Against the Japanese yen, the dollar slipped 0.06% to 139.52.

The US dollar index fell 0.17% to 103.40, remaining near Monday’s low of 103.24, the lowest since May 23.

The Bank of Japan (BOJ) is expected to announce a monetary policy decision on Friday and is expected to maintain its ultra-loose stance and yield curve control (YCC) stance.

“We now expect the BOJ to change its YCC policy in July, but as in the past, it could make that change without prior notice,” said Chong Hoon Park, Standard Chartered’s head of economic research for Korea and Japan Bank of Korea.

“The central bank will likely continue to send a dovish message or have no intention of changing policy until it changes direction.”

(Reporting by Rae Wee. Editing by Edmund Klamann and Sam Holmes)

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