Dollar holds above recent lows

The dollar just about managed to hold on to its gains on Thursday as investors considered whether the Federal Reserve is moving closer to talking about reducing its asset purchases, and as traders wait for U.S. inflation data.

Investors weigh up if Fed will begin tapering debate

The Chinese yuan reached a new three-year high as investors become more confident that China’s central bank is comfortable with a stronger currency amid the country’s economic recovery.

It was the only important move in another quiet day for the forex markets, with most currencies pinned in recent ranges as traders wait for any hints on the direction of U.S. monetary policy.

The euro traded at $1.2203 with an increase of 0.1%, and the yen near a one-week low at 109.17 per dollar. Sterling fell to a week-low of $1.4092 before recovering slightly.

Fed officials downplay prospects of rising inflation

Fed officials have this week downplayed prospects of rising inflation driving a knee-jerk policy response. But officials and vice chair Richard Clarida have made a slight shift in tone by accepting that the time to talk about policy changes might be approaching.

Even so, most analysts think the Fed actually talking about reducing its asset purchases is quite a way off, limiting any rebound in the dollar.

“While the talk of tapering could keep investors on edge, thus subjecting markets to bouts of volatility, we believe the U.S. central bank will give ample notice before changing policy,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

Mary Daly, San Francisco Fed president, has also confirmed the central bank is beginning to raise the subject of tapering. “We’re talking about talking about tapering, and that is what you want out of us,” she said in an interview with CNBC on Tuesday. “You want to be long-viewed here.”

According to ING analysts, any near future increases in the dollar “should be rather short-lived, particularly when the eurozone economic data are set to continue improving.”

The New Zealand dollar went as high as $0.7306 and the Australian dollar rose to $0.7748.

China’s yuan hits three-year high against the dollar

China’s yuan rose 0.1% to 6.3679 per dollar in offshore markets with investors raising their bets on further strength.

China’s currency hit its strongest level against the dollar in three years, presenting a challenge for Beijing which seeks to balance demand for the country’s exports with rising commodity prices.

A stronger Chinese yuan would make it cheaper for the country’s industrial producers to buy raw materials but would affect its exporters. In the fourth quarter, the country’s GDP growth returned to pre-pandemic rates, buoyed by strong industrial production and exports, though domestic consumption has delayed the wider recovery.

Traders wait for inflation data

Market attention now focuses on U.S. inflation data which is due on Friday as investors measure the extent of a jump in price growth in recent months.

Economists expect core personal consumption expenditures prices to jump 2.9% year-on-year in April, compared with a year-on-year rise of 1.8% the previous month.

“The PCE deflator will be even more closely watched,” said Commonwealth Bank of Australia currency strategist Kim Mundy.

The latest concern about inflation came about when data in mid-May showed April U.S. CPI running at an annual rate of 4.2%, well above forecasts for 3.6%.

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