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Dollar Drops Ahead Of CPI Test, Placing Pressure On The Yen

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Woman holds U.S. dollar banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration/File Photo Purchase Licensing Rights

(CTN News) – On Wednesday, falling Treasury rates and the dollar were trading close to a one-month low versus the euro. Later in the day, traders were looking forward to a significant US inflation report that might impact the direction of Federal Reserve policy.

The yen hovered around a two-week low as the yield differential between domestic and foreign bonds widened, which encouraged more selling of the Japanese currency.

The yuan dropped to its lowest level against the dollar in two weeks as a result of US President Joe Biden’s announcement of sharp tariff rises on a range of Chinese goods, including computer processors, which intensified tensions with Beijing.

The euro fell 0.04% to $1.0814 in early Asian trading hours, although it was still close to the previous day’s high of $1.09255, which was last observed on April 10.

The US dollar index, which measures the value of the currency against six major rivals and is heavily weighted towards the euro, fell to a one-and-a-half-week low of 104.95 on Tuesday but then stabilized at 105.04.

The benchmark long-term US Treasury yield fell 3 1/2 basis points (bp) overnight, although it was largely unchanged at 4.4472%.

According to a Reuters survey, the core consumer price report due on Wednesday is expected to show that the CPI grew by 0.3% in April compared to a 0.4% increase in March.

Fed Chair Jerome Powell gave a positive assessment of the US economy on Tuesday, forecasting above-trend growth that will continue and upholding the Fed’s belief in declining inflation, which has been somewhat weakened but is still essentially intact in light of recent data.

Higher-than-expected consumer prices in the first quarter of the year led to a considerable repricing of the Federal Reserve’s rate-cutting path; those bets have since been trimmed to roughly 45 basis points of reductions for the year.

The dollar continued to rise versus the yen overnight,

Despite weakening against most of its competitors. After peaking at 156.80 yen overnight, the dollar increased by 0.06% on Wednesday to reach 156.535 yen.

In comparison, Japanese long-term rates are currently only 0.96%, much lower than those of the United States. This is true even if the probability of another rate increase in June is increasing and the Bank of Japan has recently taken a more aggressive attitude.

Traders and analysts believe that the two waves of aggressive yen purchasing that followed the dollar’s rise to a 34-year high of 160.245 yen on April 29 were orchestrated by the BOJ and the Japanese finance ministry.

Tony Sycamore, an analyst with IG, wrote in a note that “The BOJ will hope that tonight’s US CPI release is in line with expectations to avoid the need for a difficult conversation tomorrow regarding when the appropriate time is to initiate a third round of intervention, bearing in mind that the previous two rounds have failed to reverse the yen’s fortunes.”

The dollar was trading at 7.2409 yuan offshore after dropping over night to its lowest level since May 1 at 7.2460 yuan.

Beijing quickly pledged revenge when the Biden administration imposed significant tariff increases on Chinese products like electronics, medical equipment, and batteries for electric vehicles.

Reuters broke the story of the obstructing levies last week. In other currency markets, the New Zealand dollar peaked at $0.6051, up more than a month ago, while the Australian dollar hit a one-week high of $0.6630 on Wednesday.

Bitcoin was at $61,636, mostly unchanged.

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Salman Ahmad is a seasoned writer for CTN News, bringing a wealth of experience and expertise to the platform. With a knack for concise yet impactful storytelling, he crafts articles that captivate readers and provide valuable insights. Ahmad's writing style strikes a balance between casual and professional, making complex topics accessible without compromising depth.

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