Dollar languishes as focus turns to CPI, Fed speakers

The dollar experienced a decline on Wednesday as traders awaited new insights regarding the timing of interest rate increases amid ongoing inflation concerns. The currency weakened from an 18-month peak observed the previous day, as oil prices declined and investors recalibrated their expectations for the AI-driven surge that had bolstered demand for US assets.

The euro maintained its gains due to budgetary concerns in France, which kept regional bond yields elevated and heightened market volatility. Analysts now emphasize the forthcoming release of US Consumer Price Index (CPI) data and speeches from Federal Reserve policymakers, which could shed light on the anticipated direction of interest rates.

Carol Kong, a currency strategist at Commonwealth Bank of Australia, warned that a significant rise in core CPI due to robust consumer demand and elevated costs could intensify market pricing for an October Fed hike, thereby strengthening the USD. The dollar index, which gauges the greenback's performance against a basket of currencies, slipped 0.02% to 102.16, following a 0.35% decrease on Tuesday.

The euro climbed 0.04% to $1.1203, while the yen remained relatively stable at 158.32 per dollar, and the British pound edged up 0.03% to $1.3256. Traders project a 77% probability of the Federal Reserve maintaining interest rates steady during its scheduled meeting on October 27-28, up from 51% a month prior. They anticipate around 75 basis points of tightening by the end of 2027.

In contrast, investors have withdrawn expectations of a Fed rate hike later this month, after two policymakers advocated for accumulating more evidence before determining the necessity of further tightening. Fed Governor Christopher Waller asserted that inflation expectations remain well-anchored. Richmond Fed President Thomas Barkin will participate in a fireside chat in Virginia, and Federal Reserve Vice Chair for Supervision Michelle Bowman is slated to attend discussions in Bangkok.

The International Monetary Fund and World Bank's annual meetings continue in Bangkok, with several appearances expected from European Central Bank President Christine Lagarde on Wednesday. Meanwhile, the Australian dollar gained 0.06% against the greenback, settling at $0.6984, and New Zealand's kiwi strengthened 0.09% to $0.5614.