US dollar firms before inflation data; euro struggles

London

THE US dollar edged higher to a new nine-day high on Thursday, thanks to a bounce in equities and concerns that US inflation pressures will pick up - although worries about an escalation in trade conflict capped gains.

Stock markets in China rose more than 2 per cent and the offshore yuan climbed half a per cent, boosting appetite for risky assets and pushing the US dollar higher - especially against safe-haven currencies such as the yen and the Swiss franc.

"Overnight developments in China were quite positive for risk appetite, and expectations in a pick-up in inflationary pressures is boosting the greenback," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

The US dollar edged 0.2 per cent higher to 94.91 against a basket of its rivals, its highest since July. 3. It rallied half a per cent against the yen at 112.56 yen.

The conventional wisdom is that any escalation in trade conflict between the United States and its trading partners will feed through to inflation and prompt the US Federal Reserve to raise interest rates at least twice more this year. But some market watchers said that the US dollar may have peaked for now.

With the stimulus effect from US tax cuts expected to wane next year and worries that the trade war rhetoric may fuel a sell-off in global stock markets, some analysts advise caution in buying the US dollar at these levels.

"If stocks drop sharply then the Fed will pause; and moreover, we think the US is towards the end of its rate hike cycle," said Thu Lan Nguyen, a foreign exchange analyst at Commerzbank in Frankfurt. After seven rate rises since December 2015 to 2 per cent, markets expect three or four rate hikes by the end of 2019.

But despite the widening interest rate differentials in favour of the US dollar - spreads between 10-year US Treasuries and equivalent German Bunds are near 30-year highs at 2.59 per cent - the US dollar has failed to power ahead in recent days, notably against the euro.

Money managers at Russell Investments believe that the risks of a US recession are rising for late 2019, encouraging the US dollar to hit a near-term peak.

Investors were looking US consumer inflation data due at 1230 GMT for further clues on when and how fast the Fed will raise interest rates. REUTERS