Dollar slips with inflation in focus

The dollar fell on Tuesday ahead of a keenly anticipated US inflation report, while the euro and sterling strengthened after European data underlined the resilience of the labour market across the region.

The dollar index, which measures the performance of the US currency against six major rivals, fell 0.3 per cent to 102.89 ahead of January's consumer price report.

Markets are looking to inflation data for further clues on the Federal Reserve's policy outlook, with the headline number expected to have risen by an annual 6.2 per cent in January according to a Reuters poll, easing from December's 6.5 per cent rate.

"The US inflation problem is not yet completely solved, and though some key pieces of the rebalancing process are underway, the Fed needs to keep growth below potential to further rebalance the labour market and bring inflation back to target," said Isabella Rosenberg, FX analyst at Goldman Sachs.

She added that "if inflation continues to drift lower despite very strong labour market gains, then the macro backdrop could continue to push towards dollar depreciation".

The US central bank earlier this month raised interest rates by 25 basis points and said it was turning the corner in its fight against inflation.

Money markets show traders are pricing for US interest rates to peak at around 5.2 per cent in July and ending the year at 4.9 per cent, moving away from earlier expectations for sharper rate cuts later this year.

Against a weakening dollar, the euro rose as a flash estimate of employment in the euro zone showed the number of people with jobs increased by 0.4 per cent quarter-on-quarter, twice as fast as expected by economists polled by Reuters, despite slowing economic growth.

Meanwhile, in Britain, data showed the pace of growth in basic pay sped up again in the last three months of 2022 even as the labour market cooled. The pace of pay growth in Britain is being monitored closely by the Bank of England (BoE) as it gauges how much higher to raise interest rates.

"With the BoE having already signalled on numerous occasions that a tight labour market remains a threat to price stability, today's figures will cement expectations that interest rates will be raised further at next month's MPC meeting," said Stuart Cole, head macro economist at Equiti Capital.

Money markets are pricing in an 80 per cent chance of the BoE raising rates by 25 bps in March and a 74 per cent chance of a 50-bp hike by the European Central Bank next month. IRPR

By 1303 GMT, the euro was up 0.39 per cent against the dollar at $1.0766, having fallen 2.5 per cent from a 10-month high of $1.1034 on Feb 2. Sterling (GBP= D3) rose 0.58 per cent to $1.2211 to an 11-day high against the greenback.

Elsewhere, Japan's government named academic Kazuo Ueda as its pick to become the next central bank governor, with investors betting that the surprise choice could preclude an end to the unpopular yield-control policy.

The Japanese yen strengthened 0.31 per cent to 132.00 per dollar. The yen dropped sharply last year to a 32-year low of 151.94 per dollar, as US rates rose and Japanese rates stayed near zero, but it has since recouped some of those losses as the Fed looks to pause its tightening, while speculation increases that the BOJ will move away from its ultra-loose policy.

Data on Tuesday showed Japan's economy averted recession but rebounded much less than expected in October-December as business investment slumped, meaning an exit from stimulus will prove a challenge for the BOJ.