Fed talk subdues US dollar as inflation remains focus

London

THE US dollar hovered above a 21/2-month low versus major peers on Wednesday, as traders hung on to bets that the Federal Reserve would remain steadfast in its easy policy settings ahead of data expected to show a sharp rise in annual US inflation.

Analysts forecast figures due at 1230 GMT to show a 3.6 per cent lift in year-on-year prices, boosted by last April's low base. The month-on-month forecast is for a modest 0.2 per cent rise.

"We further expect that the release would highlight that, in addition to base effects in commodity prices, the US inflation spike is driven by factors with greater staying power that could result in a more persistent inflation overshoot than expected by the Fed at present," said Valentin Marinov, head of G10 FX research at Credit Agricole. "This should, at least in theory, boost US Treasury yields."

Higher numbers might add pressure on the Fed to bring forward rate rises, a worry which has contributed to a sell-off in rate-sensitive tech shares this week. But currency markets have been soothed by repeated promises of patience from Fed speakers, and the dollar has been pressured by gains in commodity currencies.

The greenback touched its weakest in more than two months against the euro on May 11, following a strong European growth survey, and it traded just shy of that level at US$1.2126 by midday in London.

The yen fell 0.1 per cent to 108.69 per dollar.

Risk aversion helped a gauge of the safe-haven dollar a fraction higher to 90.274 as selling pressure persisted in stock markets, but that still left the dollar index just above key support around 89.677 and 89.206.

Commodity currencies cooled their heels near milestone peaks, with the Aussie and kiwi sliding 0.6 per cent to sit just below recent 10-week tops, while the Canadian dollar was little changed just shy of May 11's almost four-year high.

Sterling clung to recent gains to trade at US$1.4130 as UK GDP data came in stronger than expected.

Nominal US yields crept higher with the focus on inflation, but real yields remain negative and under pressure.

The US currency is also being weighed down by the improving global growth outlook, which tends to draw investors' cash to emerging markets, and by big and growing US trade and current account deficits which also send dollars abroad. REUTERS