SINGAPORE (Reuters) – The dollar found support on Thursday from a sense that the Federal Reserve is slowly but surely edging towards a discussion about tightening monetary policy, while the yuan hit a three-year high as China’s central bank kept to the sidelines.

Investors are heavily short dollars in the belief that U.S. trade and current account deficits will widen as the world recovers from the pandemic. But the mere suggestion of tapering is enough to hold off further selling, and, following a surprise jump in consumer prices in April, markets are also on tenterhooks ahead of U.S. jobs and GDP data on Thursday and inflation on Friday.

Majors were mostly steady through the Asia session, with the around $1.2190 and the yen and sterling softening very slightly to hit one-week lows.

Dollar strength also clipped the wings of the kiwi and it bought $0.7286 after hints of a 2022 rate hike by the Reserve Bank of New Zealand had pushed it as high as $0.7316 on Wednesday. The Australian dollar dipped to $0.7732.

The yuan bucked the trend because traders took central bank’s fixing of the daily midpoint at stronger than 6.4 per dollar as a sign that further gains might be tolerated. [CNY/]

It has benefited from inflows into China’s credit and equity markets as a government vow to address sharp commodity price gains allayed fears about rising inflation. And the fact that a virtual call between top U.S. and Chinese trade officials seemed to go without acrimony on Wednesday also helped, and the yuan rose to 6.7399 per dollar offshore.

The U.S. dollar index held on to Wednesday’s gains and was steady at 90.055. Cryptocurrencies slipped, but not so far as to dash gains they have made since collapsing last week.

“Expect more short-covering in the USD as investors look for upside surprises in U.S. data today and tomorrow,” said strategists at DBS Bank in Singapore in a note on Thursday.


The latest fretting about inflation and the risk it prompts tapering was triggered when data in mid-May showed April U.S. CPI running at an annual clip of 4.2% – juiced by the low base of the pandemic year, but still well above forecasts for 3.6%.

Fed officials have sought to hose this down with plenty of remarks about how much further they think the recovery needs to run. But they, and notably influential vice chair Richard Clarida, have also began publicly acknowledging at least that the time to talk about policy changes might be approaching.

“That’s probably behind the USD strength we’re seeing at the moment,” said Commonwealth Bank of Australia (OTC:CMWAY) currency strategist Kim Mundy on the phone from Sydney.

“The fact that we’re expecting to see quite a strong jump in headline inflation might just reinforce market expectations that maybe the Fed is on track to introduce tapering later this year,” she said, adding Friday’s PCE will be closely watched.

Economists expect core PCE prices to jump 2.9% year-on-year in April, compared with a year-on-year rise of 1.8% a month earlier. Traders said that waiting on this number and on figures through the summer might hem majors into tight ranges until the inflation situation and rates outlook becomes a bit clearer.

According to RBC Capital markets, the yen, which is sensitive to U.S. rates movements and began the year tumbling as yields leapt, has spent May in its tightest range since December 2019 and, excepting that month, its tightest range in 45 years.

By contrast, the hints of clarity around rate hike timing in New Zealand has vaulted the kiwi closer to the Canadian dollar and Norwegian crown among the best performing G10 currencies.

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