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Dollar Edges Down Ahead of Data, Poised for First Monthly Drop in 2024

The U.S. dollar experienced a slight decline on Tuesday, maintaining tight ranges against its counterparts as investors awaited crucial inflation data releases from major economies, which could shape the global interest rate landscape.

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The greenback was also on the brink of recording its initial monthly decline in 2024.

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Athanasios Vamvakidis, global head of forex strategy at BofA, noted, “A backdrop where the Federal Reserve can start cutting rates this year, even in December, is consistent with further dollar weakness.” He attributed the dollar’s deceleration to some softness in U.S. economic data and unexpectedly robust figures from the euro zone. Furthermore, he emphasized that the Fed’s resistance against speculation of potential rate hikes had curtailed the dollar’s appreciation.

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Market sentiment currently reflects more than full expectations for a U.S. rate cut in December, with an 80% probability of such a move in November and a 60% likelihood in September.

Against a basket of currencies, the dollar dipped by 0.11% to 104.44, marking a monthly decline of 1.7%.

Despite dovish commentary from European Central Bank (ECB) policymakers and stagnant German business morale data, the euro advanced by 0.16% to $1.0876. ECB’s Francois Villeroy de Galhau affirmed market expectations of an impending rate cut next week, with investors adjusting their forecasts for future ECB actions.

German and euro zone inflation data scheduled for Wednesday and Friday, respectively, will provide insights into the timing of potential easing measures from the central bank.

However, the focal point for markets remains Friday’s release of the U.S. core Personal Consumption Expenditures (PCE) price index report, the Federal Reserve’s preferred inflation metric. Expectations are for it to remain stable on a monthly basis.

Rodrigo Catril, senior FX strategist at National Australia Bank (NABZY), emphasized, “The market is well priced for a benign number, and that needs to be delivered … for current Fed cut expectations for this year to be sustained.” He cautioned that any surprising increase in the PCE index could trigger significant movements in U.S. yields and prompt a rally in the dollar.

Meanwhile, the yen hovered near 157 per dollar, standing at 156.67 per dollar. Vamvakidis of BofA suggested that a scenario of Fed rate cuts in 2024 could strengthen the yen against the dollar.

Elsewhere, sterling and the New Zealand dollar climbed to over two-month highs, reaching $1.2783 and $0.6165, respectively. The Aussie dollar also edged up by 0.15%. Australian monthly consumer price index data is awaited on Wednesday.

In the realm of cryptocurrencies, bitcoin declined by 2.6% to $67,778, while ether fell by 0.9% to $3,853.50.

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