The greenback cut losses, however, after data showed that some areas of inflation remained relatively elevated in November even as price pressures were widely as expected
The dollar dropped on Tuesday before the Federal Reserve officials give updated economic and interest rate projections after their latest policy meeting on Wednesday.
The greenback cut losses, however, after data showed that some areas of inflation remained relatively elevated in November even as price pressures were widely as expected.
Traders are pricing in the prospect of an interest rate cut in May, which was pushed back from March after stronger than expected jobs gains on Friday. But some analysts see that as still likely too optimistic.
Data on Tuesday showed that U.S. consumer prices unexpectedly increased in November as a decline in the cost of gasoline was more than offset by rise in rents. So-called supercore inflation, which tracks the cost of services minus energy and housing, was also higher.
Once we dig into the data we can see that some of the underlying numbers are possibly a little sticky, especially the supercore numbers, said Shaun Osborne, chief foreign exchange strategist at Scotiabank in Toronto.
Generally we have seen sufficient progress on inflation to keep a rate cut as the next move, but it is really about the timing at this point and these numbers indicate that we still need to see some further progress on some of these underlying measures before the Fed will be comfortable cutting interest rates, he said.
Investors will focus on how Fed officials see the economy holding up and where they see interest rates over the coming quarters when the Federal Reserve concludes its two-day meeting on Wednesday.
The changes in the Fed’s forecasts should be significant, reflecting the more resilient economy than expected, the still tight labour market, the cooling in inflation, and that last 25 basis points hike to 5.625 per cent that had been plugged into the dots, analysts at Action Economics said in a note on Tuesday.
Traders will also be watching to see if Fed Chairman Jerome Powell pushes back against the prospect of interest rate cuts in the first half of 2024.
The dollar was 0.19 per cent lower on the day against a basket of currencies at 103.85. It got as low as 103.48 immediately after the data, before climbing. The dollar had declined before the inflation data as traders positioned for a dovish number.
The euro was 0.24 per cent higher at $1.0790. It was near $1.0809 before the data. The greenback dropped 0.40 per cent to 145.60 Japanese yen, after earlier getting as low as 144.75. The yen has been volatile on speculation that the BoJ may be closer to ending its negative rate policy.
