The dollar rose and fell, causing the market to diverge on U.S. CPI expectations

At the beginning of Asian trading on Tuesday (February 14), the dollar index fluctuated narrowly and is currently trading around 103.30. The dollar index rose and fell back on Tuesday. Earlier, the dollar approached a high of more than a month, reaching a high of 103.84, because the market expected the growth rate of US inflation in January to pick up. But then this expectation cooled down. The New York Federal Reserve said on Monday that the US public still expects high inflation pressures in the near future and more moderate long-term inflation in January. People also lowered their expectations for future income growth. The dollar index turned from rising to falling, closing at 103.27 on Monday, down about 0.29%.

Some people also revised their expectations on Monday, suggesting that the CPI could be slightly lower.

"We expect core CPI to rise 0.3 per cent [month-on-month], slightly below the average analyst estimate and in line with the recent pace of core inflation," the economists noted.

The dollar rose to a six-week high against the rate-sensitive yen on expectations that the Federal Reserve will keep tightening monetary policy for longer, a view that will be challenged or confirmed by CPI data.

Joe Manimbo, senior market analyst at payments firm Convera in Washington, said: "Rising equities and falling yields are causing the dollar to take a breather ahead of tomorrow's inflation data, risk trading is also weighing on the yen, and the fact that the next governor of the Bank of Japan may not necessarily signal an imminent change in negative interest rate policy is not helping the yen."

The dollar rose to 132.91 yen in intraday trading on Monday, its highest since January 6. New York fell back to 132.35 in late trading, an increase of about 0.75%. Rising Treasury yields were a major factor driving the yen's weakness. The yield on the 10-year Treasury hit a six-week high of 3.755% on Monday, and the yield on the two-year Treasury hit 4.56%, its highest since the end of November. Although late Treasury yields fell back, the dollar held most of its gains against the yen. "The market is not looking to short the dollar against the yen until Tuesday's CPI announcement," said Marc Chandler, chief market strategist at Bannockburn Forex in New York.

The yen fell sharply to a 32-year low of Y151.94 against the dollar last year as US interest rates rose while Japanese rates remained near zero.

This year, the yen has regained ground as U.S. interest rates appear to be nearing their peak and expectations have risen that the Bank of Japan will move away from its ultra-loose stance, but both scenarios now look delayed.

The government is likely to nominate Kazuo Ueda, a former member of the BoJ's policy board, as its next governor, two government officials familiar with the matter told the media on Friday, the same day that Mr. Ueda said it was appropriate for the BoJ to maintain its current ultra-loose policy.

In the United States, money markets expect U.S. interest rates to peak at 5.2 percent around July, compared with the Federal Reserve's current target range of 4.5-4 percent, but markets have mostly pulled back on expectations of a major rate cut later this year.

After surging last week, the dollar slipped in volatile trading on Monday as investors consolidated ahead of Tuesday's release of key U.S. consumer price index (CPI) data on the strength of stocks and falling long-term Treasury yields.

"After last week's strong rally, there is a moderate pullback in the dollar," said Chandler at Bannockburn. "I don't think we have broken through the key levels yet. But after last week's move, we are consolidating some positions ahead of Tuesday's CPI."

According to a Reuters poll, investors are expecting data released on Tuesday showing that overall CPI rose 0.5% month-on-month in January and fell 0.1% in December, with core CPI growth rising to 0.4% from 0.3% the month before.

The euro rose 0.4% to $1.0719 in late New York trading on Monday, hitting a one-month low of $1.0656 in Asian session trading. Sterling rose 0.67% to $1.2134 on Monday after touching a one-month low of $1.1961 last week.

The Swiss franc strengthened after Switzerland reported higher-than-expected inflation data, with the dollar sliding as low as 0.9193 against the franc and falling 0.4 per cent to 0.9197 in late trading in New York.

The Australian dollar and New Zealand dollar rallied on Monday, and global stock markets generally rose on Monday, reflecting the recovery of market risk-taking willingness and providing upward momentum to commodity currencies. The Australian dollar rose 0.66% against the U.S. dollar on Monday to close at 0.6964; the New Zealand dollar rose 0.81% against the U.S. dollar on Monday to close at 0.6358.