Dollar falls as traders await Fed lift-off signal

The dollar weakened broadly on Wednesday, with investors cautious ahead of U.S. inflation data and minutes from the Federal Reserve that could signal whether the central bank is on track to raise interest rates next month.

With slumping Chinese stocks stoking fears about the stability of the world’s second-largest economy, the euro gained 0.4 percent against the dollar EUR= as a diminished appetite for risk drove investors who had held euro-funded positions in emerging market currencies to buy back the single currency.

The dollar has surged by almost 20 percent against a basket of major currencies in the past year as expectations have grown that the Fed would become the first major central bank to hike rates since the financial crisis. .DXY

And although the greenback has stalled in the past few months as mixed U.S. data and worries over global growth have pushed back expectations of when that hike would come, most investors now reckon that the Fed “lift-off” will come by the end of the year, perhaps as soon as September.

The Bank of England is expected to follow the Fed with a hike, and that view was bolstered on Tuesday after better-than-expected core UK inflation numbers that sent sterling to a 7-1/2-year high on a trade-weighted basis =GBP.

“The market may well look for a similar pick-up in the U.S. core inflation as we’ve seen in the UK, given the similarity to the UK economy – both are domestically oriented economies with large services sectors,” said Morgan Stanley’s head of European FX strategy in London, Ian Stannard.

Stannard expects the euro to fall to $1.05 by the end of the year as the European Central Bank’s 1 trillion euro quantitative easing program feeds through, but reckons that the single currency could gain in the short term.

“For the euro to go down you need strong outflows from the euro zone to take place, and that comes in a strong risk environment,” he said. “At the moment we don’t have that environment, with the uncertainty around China and the volatility that’s causing in global equity markets.”

The dollar was 0.3 percent lower on the day against its basket at 96.747, while the euro traded at $1.1065.

Economists polled by Reuters forecast that data released at 1230 GMT will show U.S. consumer prices rose 0.2 percent in July from a month earlier, a shade less than the 0.3 percent in June.

“Another uptick in the U.S. Consumer Price Index may spark a sell-off in EUR/USD as market participants ramp up bets for a Fed rate hike at the September 17 interest rate decision,” said David Song, currency analyst at DailyFX. “However, the renewed decline in oil prices may drag.”

Source: Reuters