Dollar weak after soft U.S inflation data, focus switches to Fed

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By Ankur Banerjee

SINGAPORE (Reuters) - The U.S. dollar struggled to gain a foothold on Wednesday after a sharp dive overnight on cooler-than-expected inflation data, which fuelled expectations that the Federal Reserve will chart a slower rate hike path later in the day.

After delivering four consecutive 75 basis points hikes, the U.S. central bank is widely expected to increase interest rates by 50 basis points as it concludes its two-day meeting on Wednesday.

The euro was flat against the dollar at $1.0627, not far off a six-month high of $1.0673 it touched in the previous session.

The Japanese yen, which jumped 1.6% on the dollar on Tuesday, hovered at 135.435 per dollar, while sterling was last trading at $1.2351, flat on the day.

The dollar index, which measures the greenback versus six major currencies, was flat at 104.05, having made a six-month low of 103.57 in the wake of the inflation data.

It is down 9% since hitting a 20-year high in September as the expectations of high and rising U.S. interest rates which fuelled dollar gains have started to ease off.

U.S. consumer prices rose less than expected for a second straight month in November, with underlying consumer prices advancing by the least in 15 months, the report from the Labor Department on Tuesday showed.

The deceleration in CPI inflation supports the case for the FOMC to taper the increase in the Funds rate to 50 basis points, said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY) (CBA).

"We expect FOMC Chair Powell at his press conference to talk about the risks to economic growth as well as the need to bring inflation down to target," Kong said, noting the focus on economic growth will likely be welcomed by risk assets and pull the dollar lower.

Fed funds futures have priced in a lower terminal rate, where the Fed stops hiking just below 5% by March. Traders are now betting on 25-basis-point increases at each of the Fed's first two meetings of 2023 and no more, with some chance the last hike could come in May instead of March.

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Currency bid prices at 0537 GMT

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

Previous Change

Session

Euro/Dollar

$1.0627 $1.0630 -0.01% -6.51% +1.0639 +1.0620

Dollar/Yen

135.4150 135.5050 +0.00% +0.00% +135.7250 +135.4000

Euro/Yen

143.91 144.16 -0.17% +10.43% +144.2600 +143.8800

Dollar/Swiss

0.9288 0.9286 -0.01% +1.80% +0.9296 +0.9286

Sterling/Dollar

1.2356 1.2365 -0.05% -8.61% +1.2371 +1.2345

Dollar/Canadian

1.3567 1.3544 +0.14% +7.28% +1.3574 +1.3550

Aussie/Dollar

0.6842 0.6858 -0.23% -5.88% +0.6857 +0.6822

NZ

Dollar/Dollar 0.6443 0.6463 -0.28% -5.84% +0.6464 +0.6434

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ