The US Dollar Weakens Ahead Of Inflation Scrutiny.

(CTN News) – Ahead of the release of a crucial US inflation gauge later today, the dollar remained weak, hovering close to its lowest level in over four months.

This data will offer further insight into the extent to which the Federal Reserve can potentially reduce interest rates in the coming year. During early trading in Asia, the greenback reached its lowest point against the New Zealand dollar in five months and its lowest level against the euro in three weeks.

This decline followed a period of risk aversion in New York, which prompted a sell-off in US stocks and a strengthening of the dollar. Currently, the Kiwi is slightly up by 0.03% at $0.6296, having reached a session high of $0.6298, while the euro reached a peak of $1.10125.

The focus now shifts to the US core personal consumption expenditures (PCE) print, which is the Federal Reserve’s preferred measure of underlying inflation.

This will provide clues on the extent to which inflation in the world’s largest economy is slowing down. Analysts expect the core PCE price index to have increased by 3.3% on an annual basis, slightly lower than October’s figure of 3.5%.

According to Chris Weston, head of research at Pepperstone, the distribution of US inflation is now considered skewed and one-sided, with a higher probability of lower levels.

This gives the Federal Reserve more room to ease its policy if necessary. While Fed officials acknowledge that their work is not yet complete and reaching the 2% inflation target is challenging, they can implement rate cuts more efficiently when the core PCE is at 3.5% and declining.

The US dollar, measured against a basket of currencies, is currently at 101.76, close to a four-month low of 101.72 reached in the previous session.

The dollar index is on track for a weekly loss of approximately 0.8% and is expected to extend last week’s decline of 1.3%. This follows the Federal Reserve’s indication of potential rate cuts in the coming year during its last policy meeting for 2023.

The Australian dollar has dipped slightly to $0.6797 but remains near its five-month high of $0.68035 reached on Thursday.

The British pound is relatively unchanged at $1.26905 and is expected to have a marginal weekly gain. However, it has been pressured by lower-than-expected British inflation data released this week.

As inflation approaches its target, the market is likely to pay less attention to hawkish comments from policymakers, particularly in the UK where the economic outlook is weak, according to Jane Foley, senior FX strategist at Rabobank.

In Asia, the Japanese yen is currently at 142.09 per dollar, unaffected by Friday’s data showing a slower pace of increase in Japan’s core consumer prices. This relieves some pressure on the Bank of Japan (BOJ) to phase out its massive stimulus measures.

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