Dollar sellers hit pause for US inflation data

The dollar index has risen this year as investors shifted their expectations from rate cuts to hikes following the Iran war, which caused energy prices to surge and fuel inflation. In Sydney, the dollar found support during a volatile few days and remained stable during Tuesday's Asia session as traders anticipated US inflation data. The release of this data could potentially boost the dollar if it strengthens the case for additional rate hikes.

The Australian dollar experienced a nearly 1% increase on Monday, reaching US$0.6921 early Tuesday, while the New Zealand dollar continued its upward trend, trading at US$0.5624. The euro also jumped 0.7% overnight, reaching US$1.1220, reversing a drop it had made earlier in the week due to robust US job data boosting the dollar and interest rate expectations. This put the euro/dollar pair roughly in the middle of a range it had maintained for a month.

Markets have shown a strong preference for dollars, leading to a gain in the dollar index throughout the year. This trend started when initial forecasts for US interest rate cuts were quickly replaced with bets on rate hikes after the Iran-Israel conflict increased energy prices and inflation. A surprising October jobs report, which exceeded forecasts by more than double, has pushed the market to price an 85% chance of a Federal Reserve rate increase in the upcoming month.

US CPI data is pending, with economists estimating that headline inflation will rise to 3.9% and core inflation to 2.8% year-over-year in October. If the actual figures surpass these projections, it could further fuel rate hike expectations and potentially lift the dollar, according to analysts. Imre Speizer, a strategist at Westpac in Auckland, noted that markets have priced in two US rate hikes by mid-next year, but this outlook has become somewhat more pessimistic due to recent turbulence in AI stocks. This uncertainty could potentially slow US growth in 2027 and help cap the dollar's potential top.