Dollar softens, sterling squeezed as focus turns to U.S. inflation

Dollar softens, sterling squeezed as focus turns to U.S. inflation

By Samuel Indyk and Tom Westbrook

LONDON (Reuters) -The dollar dipped on Thursday while sterling crosses were nursing losses in holiday-thinned trade ahead of the last major data release of the year in Friday’s U.S. inflation figures.

Sterling suffered its sharpest drop on the dollar in two months on Wednesday after British inflation dived below forecasts to an annual 3.9% in October, a two-year low.

The currency fell 0.7% to $1.2638 as traders priced in Bank of England rate cuts as soon as May. On Thursday it hit a one-week low of $1.2613, before recovering slightly as the dollar softened. It was last at $1.2669.

Against the euro the pound hit its weakest in more than three weeks at 86.78 pence, while it was also lower against the Aussie and yen. [GBP/]

Analysts are forecasting a similar easing for Friday’s U.S. core personal consumption expenditure (PCE) data, with the annual inflation rate seen slowing to its lowest since 2021 at 3.3%.

The dollar index, which measures the currency against six other including the pound, was down 0.4% at 102.01.

“Broadly speaking the market is happy to run with this Goldilocks-type soft landing scenario, which tends to lead to the dollar softening,” said Dominic Bunning, head of European FX research at HSBC.

“Even if we don’t necessarily buy into that in the medium term, in the short term it’s hard to fight it.”

Some analysts said month-end rebalancing in thin trade was also driving the dollar lower.

“US equity market outperformance through December rather suggests that passive hedge rebalancing flows will run against the USD through month end,” said Shaun Osborne, chief FX strategist at Scotiabank.

“While markets look relatively calm and trade flows appear to be thinning out, there may still be motivation to push spot rates around after all.”

Heavy selling in the final hour of equities trade on Wall Street on Wednesday had also sent a ripple of risk-aversion through markets, even as stock futures steadied.

The mood helped the safe-haven yen along with Japan lifting its growth projection for the fiscal year to 1.6%.

The yen rose about 0.6% and last traded at 142.725 per dollar.

It has still lost more than 8% on the dollar this year as the Bank of Japan has steadfastly kept short-term rates negative, against 300 basis points of U.S. interest rate hikes.

Analysts at Goldman Sachs said that markets should take note of the BoJ retaining its easing bias at the last meeting.

“Market pricing for action early next year is still too aggressive, especially when considering how widespread the disinflation narrative has become,” Goldman Sachs analysts said in a note.

“This is just one of the reasons why we think there is still limited scope for substantial yen appreciation.”

The euro was up 0.4% at $1.0986.

The Australian and New Zealand dollars traded just below Wednesday’s five-month highs. The Aussie was last at $0.6759, having touched its highest since July at $0.6779 a day earlier. The kiwi traded at $0.6262. [AUD/]

China’s yuan was steady as offshore yuan funding costs fell and China’s blue-chip stock index hovered near five-year lows. It was last at 7.14 to the dollar. [CNY/]

Bitcoin leapt back above $44,000 and was up at $44.171, just below last week’s 20-month high of $44,729.

(Reporting by Samuel Indyk and Tom Westbrook; Editing by Michael Perry and Susan Fenton and Chizu Nomiyama)