Dollar stuck near 5-month low as caution reigns ahead of US CPI, ECB tests

TOKYO: The dollar hovered near a five-month low versus major peers on Thursday as investors looked to US inflation data and a European Central Bank meeting later in the day to provide a spur for lacklustre currency markets.

Investors have adopted a wait-and-see attitude all week, sucking volatility from the market and leaving major currencies mostly range-bound.

The dollar index has fluctuated narrowly around the psychologically important 90 level, and was last at 90.206 - not too far from last month's low of 89.533, a level not seen since early January.

The euro rose to a one-week high at $1.2218 on Wednesday only to finish little changed, and was mostly flat at $1.21635 in Asia.

The yen traded at 109.565 per dollar, also little changed from Wednesday and near the middle of the 109.19-110.325 range of the past two weeks.

Deutsche Bank's Currency Volatility Index languished at its lowest level since February 2020.

The US Labor Department's consumer prices data has been much anticipated after last month's report showed consumer prices increased by the most in nearly 12 years in April.

That has stoked bets that higher prices could last longer than some anticipate, potentially calling into question the Federal Reserve's insistence that current inflation pressures are transitory and monetary stimulus should stay in place for some time yet.

Economists polled by Reuters estimated the CPI advanced 0.4% in May.

Westpac analysts side with Federal Open Market Committee (FOMC) officials in the inflation debate, and don't expect a taper of the central bank's asset-purchase programme until the second half of next year.

They forecast the dollar index will drop to 87.30 at that time, before then grinding higher again "as US monetary tightening takes effect," according to a research note.

"The FOMC is clearly fixated on the need to restore 'maximum employment,' even if that comes at a cost," the note said.

While the greenback has kept to tight ranges in the run-up to the CPI report, benchmark 10-year Treasury yields - which helped drive the dollar index to a multi-year high earlier this year - have taken a sizeable step lower in the past week and were at 1.4806% in Asia from as high as 1.6350% on Friday.

"It feels like the balance of risk is tilted to the upside on US CPI versus the consensus, which would favour a sell-off in Treasuries - (and thus) higher yields - and subsequently a stronger USD," Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a note to clients.

"Bonds seem overbought."

With the ECB, investors will be watching for any clues of an imminent slowdown to its bond-buying program.

While the ECB is widely expected to keep policy settings steady, the euro could be sensitive to changes in the bank's economic forecasts or any signal that the pace of bond buying could be reduced in months ahead.

In crypto markets, bitcoin held gains from its biggest rally in four months on Wednesday, when it jumped nearly 12%.

It last traded largely unchanged at $36,709.67, after rebounding from a three-week low of $31,025 hit on Tuesday when signs of institutional investor caution and regulatory attention drove selling.

The best-known digital token has struggled since reaching a record $64,895.22 in mid-April.

"It was looking pretty dicey," but "bitcoin has impressively held onto $33,700," wrote Pepperstone's Weston.

"It needs to push into $39,460 and the top of the recent range to really attract, but we will need to see a break here for the bulls to feel we're out of this period of vulnerability."