Fed taper talk lifts dollar ahead of inflation test

The dollar hovered near a four-month high against the euro and scaled a five-week peak on the Japanese yen. This is as the traders awaited U.S. inflation data and wagered a high reading could pressure the Federal Reserve to wind back policy support. The greenback has already caught a boost from the U.S. jobs data and from recent remarks by Fed officials. These hinted that asset purchase tapering is on the cards. Hot inflation could also add to expectations for rate hikes next year. Six straight sessions of gains against the euro sent the common currency to its lowest since late March. At $1.1720 in early Asia trade, the year’s low of $1.1704 is within range.

The yen has dropped for five consecutive sessions against the dollar. This fell marginally to 110.65 per dollar in early trade, its lowest since mid-July. The greenback also touched a two-week high against the British pound overnight at $1.3827. Charalambos Pissouros, head of research at Cyprus-based brokerage JFD Group said that with what they have in hand now, they would expect this pattern to continue. And that is with the inflation data offering another possible nudge. He added that another set of extremely high numbers, well above the Fed’s objective of 2%, could add to the view that the surge in inflation may not be transitory. And thereby, this increases further the chances for an earlier normalization by the Fed.

Fed chair Jerome Powell has repeatedly said that the inflationary pressures are likely to be transitory and linked to economic re-opening. Two Federal Reserve officials said that inflation is already at a level that could satisfy one leg of a test for the beginning of interest rate hikes.

Besides the inflation data, Federal Reserve Bank of Kansas City President Esther George will be closely watched, as will the troubling global spread of the Delta coronavirus variant. South Korea reported a record number of COVID cases, and on the other side outbreaks in China, through Southeast Asia and in Australia grow steadily. Hospitals in Texas and Florida are filling up with patients. The Chinese yuan and South Korean won both touched two-week lows early in the Asia session, with the yuan hitting 6.4902 per dollar in offshore trade and the won touching 1,155.28 per dollar.

The Australian dollar last bought $0.7335, while the New Zealand dollar sat at $0.69970. Rabobank analyst Jane Foley said that the investors have to take on board the possibility of news on Fed tapering at a time when COVID is still very apparent in various parts of the world. She added that the consequence of this is likely to be a firmer dollar, especially if the euro breaches its 2021 low.