Dollar skids as soft U.S. inflation weighs; Fed meeting looms next week

© Reuters. FILE PHOTO: U.S. One dollar banknotes are seen in front of displayed stock graph in this illustration taken, February 8, 2021. REUTERS/Dado Ruvic/Illustration

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) -The dollar slumped against major currencies on Wednesday after softer-than-expected U.S. inflation data released on Tuesday eased short-term expectations about tapering of asset purchases from the Federal Reserve.

The dollar index last stood at 92.514, down about 0.2% from Tuesday, when it dropped following the inflation data but recovered on haven demand as stocks slid on Wall Street.

But the dollar trimmed losses after positive data showing import prices fell unexpectedly in August and a higher-than-expected reading for the New York Fed's business survey.

These reports offset figures showing U.S. manufacturing output slowed in August, rising 0.2% from a 1.6% increase the previous month.

"The reality is that there is no guidance other than the obvious: poor economic indicators mean the recovery from the pandemic has slowed down more than expected by Delta," said Juan Perez, FX strategist and trader at Tempus Inc in Washington.

"The buck in the midst of all this will still have room for gains and spikes as doom and gloom play a role in diminished risk-appetite, but idiosyncratic improvements in the UK as we saw with CPI, and other regions could eventually start weakening the dollar more consistently."

Wednesday's data showed Britain's inflation rate hit its highest in almost a decade last month after a record jump that was largely fuelled by a rebound in restaurant prices.

The dollar index, a measure of the greenback's value against six major currencies, has traded between 92.3 and 92.9 over the past week as several Fed officials suggested the U.S. central bank could reduce buying debt securities by the end of the year, even after a weaker-than-expected payrolls report earlier this month.

While elevated inflation has kept pressure on policymakers, data overnight showed the U.S. consumer price index, excluding the volatile food and energy components, edged up just 0.1% last month.

The Federal Open Market Committee's (FOMC) two-day policy meeting next week should provide some clarity on the outlook for tapering and interest rates.

Tapering typically lifts the dollar as it suggests the Fed is one step closer to tighter monetary policy. It also means the central bank will be buying fewer debt assets, in effect reducing the number of dollars in circulation and increasing the currency's value.

"We think a combination of modest economic revisions (by the Fed) and steady messaging on the interest rate outlook should be supportive for the U.S. dollar, given that many other central banks are likely to lag the Fed's policy normalization process by a substantial margin," Scotiabank FX analysts wrote in a research note.

In late afternoon trading, the euro was up 0.1% against the dollar at $1.1813.

The dollar fell to a four-week low of 109.14 yen, and last changed hands at 109.38, down 0.3%.

Meanwhile, the yuan and Australian dollar slid earlier after Chinese data showed factory and retail sales growth cooled more sharply than expected last month. [L1N2QH08P]

The dollar was last down 0.1% against the Chinese currency at 6.4275 yuan.

The Aussie dollar sank as low as US$0.7301, its lowest in more than two weeks following China's data, but recovered to trade up 0.1% US$0.7331.

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Currency bid prices at 3:50PM (1950 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 92.4800 92.6720 -0.19% 2.777% +92.6830 +92.4190

Euro/Dollar $1.1815 $1.1806 +0.08% -3.30% +$1.1832 +$1.1799

Dollar/Yen 109.3850 109.6850 -0.28% +5.86% +109.7400 +109.1100

Euro/Yen 129.23 129.48 -0.19% +1.82% +129.5300 +129.0600

Dollar/Swiss 0.9196 0.9201 -0.05% +3.95% +0.9205 +0.9164

Sterling/Dollar $1.3844 $1.3808 +0.27% +1.34% +$1.3853 +$1.3794

Dollar/Canadian 1.2627 1.2693 -0.53% -0.86% +1.2708 +1.2625

Aussie/Dollar $0.7332 $0.7323 +0.12% -4.70% +$0.7339 +$0.7302

Euro/Swiss 1.0865 1.0860 +0.05% +0.54% +1.0870 +1.0841

Euro/Sterling 0.8534 0.8543 -0.11% -4.51% +0.8563 +0.8530

NZ $0.7107 $0.7098 +0.13% -1.03% +$0.7118 +$0.7074

Dollar/Dollar

Dollar/Norway 8.5710 8.6295 -0.63% -0.13% +8.6560 +8.5675

Euro/Norway 10.1298 10.1990 -0.68% -3.22% +10.2235 +10.1220

Dollar/Sweden 8.5826 8.6038 -0.23% +4.71% +8.6165 +8.5678

Euro/Sweden 10.1402 10.1631 -0.23% +0.63% +10.1734 +10.1260