Dollar edges higher ahead of European Central Bank, US inflation data

The US dollar experienced a slight uptick on Thursday, recovering some of the losses it incurred from rising oil prices and bond yields, while the euro remained close to a two-week peak ahead of a likely European Central Bank rate hike. Oil prices soared up to $102.72 a barrel as shipping attacks by Iran and the US intensified since their conflict began in late February.

Rising fuel and heating costs added to inflation worries preceding the European winter. The European Central Bank is anticipated to increase euro zone rates for the second time since the war's onset, and the surge in global bond yields, reaching multi-decade highs in some markets, has not significantly boosted demand for the dollar.

The euro, which peaked at $1.1654 on Wednesday, was last at $1.1624, a 0.1% decrease for the day. Given Europe's dependence on imported energy, the single currency is generally highly sensitive to oil-price fluctuations. However, the war's protracted duration has weakened the euro's reliance on that relationship, thereby limiting support for the dollar.

The dollar index, tracking the US currency against major peers, rose by 0.13%, but it is still on track for a weekly decline of 0.26%, primarily due to yen strength and the euro's resilience. Central bank actions are expected to play a role in the dollar's performance. The yen has gained over 6% since the late-July intervention, trading at ¥154 per dollar as the greenback climbed by 0.35%, nearly reaching seven-month highs ahead of a potential Bank of Japan rate hike next week.

US inflation data, including producer prices due later on Thursday and consumer prices on Friday, will be crucial for the yen outlook, potentially influencing whether the Federal Reserve raises interest rates at its meeting on September 15. Traders are pricing a 60% chance of a Fed rate hike this month after the stronger-than-expected nonfarm payrolls report on Friday.

Higher US rates could undermine any yield advantage gained from a Bank of Japan hike, dampening further gains in the yen. However, it is premature to conclude that the dollar/yen exchange rate should be revised lower to the ¥155 to ¥165 range, according to JPMorgan strategists.