© Reuters. FILE PHOTO: A U.S. one dollar banknote is seen in this illustration taken November 23, 2021. REUTERS/Murad Sezer/Illustration/File Photo
By Tom Westbrook
SYDNEY (Reuters) – The dollar was firm on Friday as traders wagered U.S. inflation figures could settle the course of interest rate rises next year, while the regained its footing after being knocked back by official policy.
The euro, seen as vulnerable to a Federal Reserve hike especially if European rate rises lag, dropped 0.4% on Thursday and was steady in Asia at $1.1297.
The , at 96.197, was drifting toward its seventh consecutive weekly rise ahead of the data, which is due at 1330 GMT. Annual price gains of 6.8% are expected and any upside surprise will likely be interpreted as a case for a faster Federal Reserve taper and sooner interest rate rises.
Consumer confidence data is also due on Friday and if it holds up could portend even more price pressures ahead.
“Inflation is going to accelerate,” said Tom Porcelli, RBC Capital Markets’ chief U.S. economist, who thinks the annual pace is going to pick up and keep rising to push near 7% early in the new year.
“As a result, we think that combination means a hike in March is very possible,” he said. “The market is pricing in about a 40% chance of that, but we now think it’s a bit higher. It’s probably closer to a coin flip now.”
The Fed, European Central Bank, Bank of England and Bank of Japan also all meet next week and the combination of the inflation data and the possibility of a central bank response have set market volatility gauges surging.
“Judging by the way the dollar is trading … I’d argue traders are positioning for a higher CPI print which cements a view that the Fed will increase the pace of tapering its QE programme,” said Chris Weston, head of research at Pepperstone.
“While form suggests we get a beat, we obviously can’t dismiss a poor number, and of course an inline print – I think if we get 6.4% or below then should fly.”
Volatility has also been stoked by the ebb and flow of concern about the Omicron variant and by policy in China.
A slight rise in the safe-haven yen on Thursday pointed to persistent caution, although a broad relaxation of concern in earlier sessions has the Aussie dollar up more than 2% this week and within sight of its largest weekly rise since August.
The yen was last steady at 113.51 per dollar, just above its 50-day moving average. The Aussie has bounced back hard from 70 cents to hover around $0.7149. [AUD/]
The yuan fell on Thursday after the People’s Bank of China (PBOC) raised FX reserve requirements for the second time since June and was further pressured when the central bank set its trading band midpoint weaker than expected.
However, sustained yuan buying from corporates who’ve amassed an enormous dollar stockpile over the pandemic years drove a bit of a recovery to 6.3650 per dollar on Friday – suggesting to analysts it might steady rather than reverse too far. [CNY/]
“This move by the PBOC should negate any immediate expectations of further downside drift in the dollar/yuan, although a sustained upward move in the pair is not expected,” said analysts at OCBC Bank in Singapore. “The base case for now is a return to the previous 6.3600 to 6.4000 range.”
Elsewhere, sterling has been under pressure as England has tightened restrictions to try and curb the spread of the Omicron variant. It last bought $1.3220.
The New Zealand dollar has actually been weighed down by aggressive hike prospects, with traders expecting that to drag on future growth. It hovered at $0.6791 in Asia.
Cryptocurrencies have also copped a bit of a kicking from risk aversion and bitcoin struggled for traction above $50,000. It was last at $48,286.