US dollar holds as investors await inflation data

London

THE US dollar settled below a 2½-week high hit in the previous session, as investors braced for inflation data that might offer clues on the timing of policy tightening by the Federal Reserve at a meeting next week.

While inflation readings have surged in recent weeks, global growth expectations have dampened, boosting the safe-haven appeal of the greenback. A monthly investor survey by Bank of America found growth expectations at their lowest since May 2020.

Analysts believe a strong inflation reading will further dampen the mood and put pressure on the Fed to withdraw policy stimulus.

"The Fed might thus find itself saddled with a kind of 'stagflation 2.0' - slower economic growth accompanied by rising inflation expectations. And that would make it exceedingly hard to arrive at an optimal monetary policy," said Gergely Majoros of Carmignac's Investment Committee.

Long dollar bets have climbed rapidly in recent weeks, last week hitting the highest levels since March 2020, as rising inflation prints coupled with slowing growth worries boosted the safe-haven appeal of the greenback.

Against a basket of its rivals, the US dollar index steadied at 92.59, having retreated from 92.887, which it hit on Monday. The euro changed hands at US$1.1815, having bounced back from Monday's low of US$1.17705, its lowest since Aug. 27.

Currency markets were in a quiet mood in early Tuesday trading, with a gauge of broader market volatility holding near its lowest levels for 2021.

The only source of excitement in the currency markets came from the Australian dollar. The currency fell to a two-week low after the head of the country's central bank dismissed market pricing of rate hikes in 2022 and 2023.

The Aussie extended losses to more than 0.5 per cent, falling to US$0.7336 as Reserve Bank of Australia governor Philip Lowe painted a very dovish policy outlook with no rate rises on the horizon until 2024.

Though the world's stock markets rebounded on Monday after a fall last week, some analysts also warn of growing headwinds to risk sentiment.

"Global risk appetite is edging toward a more tenuous and twitchy phase. A discordant G-2 is increasingly the problem,"said Alan Ruskin, macro strategist at Deutsche Bank in New York, referring to the trade dispute between US and China.

In crypto currencies, Bitcoin dropped to as low as US$43,400, its lowest in almost a week, and last stood at US$45,395. REUTERS