By Kevin Buckland
TOKYO (Reuters) – The dollar remained on the back foot on Wednesday after tumbling versus major peers overnight as a benign reading for U.S. producer prices reinforced bets on Federal Reserve interest rate cuts this year.
Risk-sensitive currencies stayed strong after the unexpected softening in inflation buoyed equities, even with crucial U.S. consumer price index (CPI) figures still looming later on Wednesday.
The Australian dollar reached a more than three-week peak, while sterling traded near a more than two-week high following its best one-day performance against the dollar since late April.
New Zealand’s dollar hovered near a four-week high ahead of a Reserve Bank of New Zealand (RBNZ) policy decision, with markets split over the potential for a rate cut.
The – which measures the currency against six major rivals, including sterling, the euro and the yen – was steady at 102.63 after slumping 0.49% overnight.
Traders were already certain that the Federal Open Market Committee (FOMC) would lower rates at its September meeting before the producer price data, but ramped up bets for a super-sized 50 basis point cut to 53.5% from 50% a day earlier, according to CME’s FedWatch Tool.
Commonwealth Bank of Australia (OTC:) analysts expect the dollar to be in a holding pattern before the release of U.S. CPI data, but then see risks tilted toward further weakness.
“We expect the market to double down on large interest rate cuts by the FOMC this year if the core CPI increases by 0.1%/mth or less, (whereas) we expect the market to largely play down the core CPI if it increases by 0.2%/mth or 0.3%/mth,” Carol Kong, a currency strategist at CBA, wrote in a client note.
Sterling was steady at $1.2866 following a 0.76% rally on Tuesday when it got an additional boost from data showing a surprise drop in the UK’s jobless rate.
The euro was flat at $1.0996 after rising to $1.099975 on Tuesday for the first time since Aug. 5.
The dollar was stable at 147.06 yen as it continued to consolidate around the 147 level this week.
The was little changed at $0.6637 after earlier touching $0.66395 for the first time since July 23.
The edged up 0.07% to $0.6081, close to Tuesday’s high of $0.60815, a level last seen on July 18.
While a Reuters poll of 31 analysts last week found 19 respondents forecast the RBNZ to hold the cash rate steady at 5.5%, a dozen expected the bank to cut by 25 basis points and many acknowledged it was a line call.
Meanwhile, markets have priced in a 69% chance of a cut, increasing their bets after the central bank’s survey on Thursday saw inflation expectations fall to a three-year low.
“The RBNZ is renowned for marching to its own beat, and whether inflation declining from 7.3% to 3.3% and the labour market showing signs of cracking (unemployment rate up to 4.6%) is enough to see the RBNZ cut rates today or wait until October remains to be seen,” said Tony Sycamore, a market analyst at IG.
