Dollar Down, Investors Digest Surprise RBNZ Move, Hot U.S. Inflation

© Reuters.

By Gina Lee

AiVIF.com – The dollar was down on Wednesday morning in Asia, hitting a three-month high versus the euro and a one-week high versus the yen. Higher-than-expected inflation in the U.S. re-triggered bets that the U.S. Federal Reserve will tighten its monetary policy faster than expected.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched down 0.03% to 92.727 by 12:03 AM ET (4:03 AM GMT).

The NZD/USD pair rose 0.99% to 0.7014, climbing over the 0.7 mark. The Reserve Bank of New Zealand (RBNZ) kept its interest rate unchanged at 0.25% as it handed down its policy decision earlier in the day. In a surprise move, RBNZ also said it would halt its large-scale asset-purchase program from the following week.

The AUD/USD pair edged up 0.17% to 0.7459. Australia’s Westpac consumer sentiment index, released earlier in the day, rose 1.5% in July against the previous month’s 5.2% drop, but Sydney also extended its COVID-19 lockdown by another two weeks.

The USD/CNY pair inched up 0.10% to 6.4748, ahead of the release of Chinese GDP and industrial production data on Thursday.

The USD/JPY pair edged down 0.11% to 110.48 while the GBP/USD pair inched up 0.08% to 0.3819.

U.S. consumer prices rose by the most in 13 years in June, with the core consumer price index (CPI) rising a higher-than-expected 0.9% month-on-month. Supply constraints and a continued rebound in the costs of travel-related services from COVID-19-depressed levels as the economic recovery progresses contributed to rising inflationary pressures.

"Another hotter-than-expected U.S. CPI print has got the market wondering whether the lift in inflation will prove to be transitory or more enduring," National Australia Bank (OTC:NABZY) analyst Tapas Strickland said in a note.

"Markets have sided on the hawkish interpretation, bringing forward rate hike expectations to late 2022," leading to "broad-based gains" for the dollar, the note added.

Investors now await Fed Chairman Jerome Powell's testimony before Congress on Wednesday and Thursday. Although Powell has repeatedly insisted that higher inflationary pressures would be temporary, his testimony will be scrutinized for any hints on when the central bank will begin asset tapering and hike interest rates.

Meanwhile, the Bank of Canada will update its economic forecasts at a policy announcement later in the day, where the central bank is widely expected to announce further asset tapering.

The Canadian dollar held its biggest decline in a week ahead of the announcement, largely unchanged at C$1.2500 against its U.S. counterpart but weakening toward the two-and-a-half-month low of C$1.2590 reached during the previous week.

Other central banks will also hand down their policy decisions later in the week, with the Bank of Korea’s decision due on Thursday and the Bank of Japan’s decision due a day later.