Dollar Edges Higher; Inflation Concerns to the Fore

The U.S. dollar edged higher in early European trade Wednesday, helped by higher Treasury yields as the focus turned once more towards soaring global inflation.

At 2:55 AM ET (0655 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher to 101.995, extending the previous session’s rally.

The index had fallen to a five-week low of 101.29 earlier in the week as expectations started to grow that U.S. inflation showed signs of peaking amid the Federal Reserve’s aggressive policy tightening, suggesting the U.S. central bank could pause its cycle of interest rate hikes after two more increases in June and July.

However, sentiment has started to shift again after data showed Eurozone consumer inflation soaring to a record, and oil prices climbed to their highest levels since early March, resulting in benchmark 10-year Treasury yields reaching 2.88% overnight, the highest since May 19.

Additionally, U.S. President Joe Biden met with Fed Chairman Jerome Powell, with Biden affirming a “laser focus on addressing inflation” ahead of the November midterms.

The Fed will start shrinking its $8.9 trillion balance sheet and release its Beige Book, later in the day, while New York Fed President John Williams and St. Louis Fed President James Bullard will also speak at separate events.

In terms of economic data, April job openings, the JOLTS job report, are due at 10 AM ET (1400 GMT), ahead of Friday’s release of the widely watched monthly official employment report.

“Both the JOLTS job opening and the payrolls report will be followed closely,” said analysts at Nordea, in a note. “Wage growth will not meaningfully decline as long as there is 2x as many available jobs as the number of unemployed. And service inflation will not slide when wages keep rising at the current rate.”

EUR/USD fell 0.1% to 1.0718, drifting lower from the five-week high hit earlier in the week following the release of very weak German retail sales. GBP/USD fell 0.1% to 1.2593, while the risk-sensitive AUD/USD edged lower to 0.7172 and NZD/USD fell 0.3% to 0.6493.

USD/JPY rose 0.5% to 129.34, rising to two-week high on the back of the climbing U.S. yields, while USD/CNY rose 0.3% to 6.6911.

Elsewhere, USD/CAD rose 0.2% to 1.2665, ahead of the Bank of Canada’s rate-setting meeting later on Wednesday, with a half-point increase widely expected.

The accompanying statement is likely to sound hawkish to justify the hefty hike and leave open the possibility of another half-point increase at the next meeting in July as the central bank attempts to tame inflation.