By Ankur Banerjee
SINGAPORE The dollar was steady on Friday as traders wagered that the Federal Reserve's rate hike cycle could be over after data showed U.S. consumer prices increased moderately in July, though a senior Fed official cautioned against taking a premature view.
The stronger dollar put the Japanese yen on course to test a key support level, though liquidity was thin with Japan on holiday on Friday, liquidity was thin.
The yen eased 0.10% to 144.89 per dollar in early Asian hours, its lowest since June 30, when it also briefly breached 145 per dollar level, stoking fears of another round of intervention. The yen last fetched 144.69.
"You should expect the rhetoric once yen gets to 145," said Bank of Singapore currency strategist Moh Siong Sim. "I think the market will get a lot more careful as we get to that level."
Japan intervened in currency markets September last year when the dollar rose past 145 yen, pushing the pair to around 140 yen as the Ministry of Finance bought the yen to weaken the dollar. The yen is down over 9% against the dollar for the year.
The yen was also lower against the euro at 159.135 per euro, just shy of the 15-year peak of 159.19 it hit on Thursday.
Overnight, data showed the U.S. consumer price index rose 0.2% last month, matching the gain in June, with the CPI climbing 3.2% in the 12 months through July.
Economists polled by Reuters had forecast the CPI would rise 0.2% last month and by 3.3% on a year-on-year basis. The Fed targets 2% inflation.
Traders of Fed fund futures saw a less than a 10% chance that the central bank will increase its benchmark overnight interest rate from its current 5.25%-5.50% range at a Sept. 19-20 policy meeting. The Fed's first rate cut is priced into the futures contracts by March of 2024.
"(The) CPI report appears to put another nail in the coffin for the prospects of further Fed rate hikes this year," said Nick Rees, FX market analyst at Monex Europe.
Moderating inflation, together with an easing labour market, has bolstered economists' conviction that the U.S. central bank will be able to engineer a "soft landing" for the economy.
Fed official's hawkish rhetoric though helped cap sentiment, with San Francisco Federal Reserve Bank President Mary Daly saying it was premature to suggest if the Fed has done enough on rates.
"Whether we raise another time, or hold rates steady for a longer period -- those things are yet to be determined," Daly said in an interview with Yahoo Finance. "It would be premature to project what I think would happen because there's a lot of information coming in between now and our next meeting."
The dollar index, which measures the U.S. currency against six rivals, eased 0.088% at 102.53 after some volatile trading overnight following the CPI report. The index was on course to clock gains for the fourth straight week.
Treasury yields rose on Thursday after soft demand for a sale of 30-year bonds. [US/]
In other currencies, the euro was up 0.08% at $1.0988.
The Australian dollar rose 0.15% to $0.6525, but was set for fourth straight week of losses, while the kiwi fell 0.18% to $0.601.
Earlier, the head of Australia's central bank said it was possible some further tightening will be required, while also appearing to suggest the increase in rates so far should be enough to bring inflation to heel.
Appearing before lawmakers, outgoing Reserve Bank of Australia Governor Philip Lowe said the recent data was consistent with the economy continuing to travel along the "narrow path" to a soft landing.
Sterling was last at $1.2683, up 0.06% on the day, looking to snap its three-day losing streak ahead of GDP data.
(Reporting by Ankur Banerjee in Singapore; Editing by Shri Navaratnam & Simon Cameron-Moore)
