The dollar retreated versus other major currencies on Tuesday, with traders hesitant to push the currency higher in the absence of fresh evidence that the Federal Reserve will raise interest rates aggressively again in September.

The release of US inflation data on Wednesday was shaping up to be the next major test for the dollar, which had risen substantially following Friday’s surprisingly positive jobs report, which fueled betting on another 75 basis point Fed rate hike.

However, the euro has since weakened and, in thin summer markets, succumbed to some light selling pressure on Tuesday.

The euro was up roughly 0.35 percent at $1.0226 at 1050 GMT, sterling was up 0.2 percent to $1.2102, while the dollar was down 0.1 percent to 134.86 yen.

The dollar index, which measures the currency’s value against a basket of other currencies, fell 0.2 percent to 106.15. It remained below a more than one-week high of 106.93 set on Friday.

In June and July, the Fed raised rates by 75 basis points. Money-market futures indicate that traders predict a roughly two-thirds possibility of a 75 basis point boost next month and have begun to shift expectations for rate cuts further into 2023.

Reuters polled economists predict year-on-year headline inflation (USCPNY=ECI) at 8.7 percent, which is extremely high but lower than last month’s number of 9.1 percent. The Fed’s inflation target is 2%.

Expectations for aggressive near-term rises have driven short-dated Treasury rates even higher than long-term counterparts.

The spread between two and ten-year Treasury yields, a proven recession indicator, has widened to its widest in two decades.

The dollar’s haven status, on the other hand, makes the greenback’s reaction more difficult to forecast, especially when growth and geopolitical concerns swirl.

China has prolonged military training near Taiwan, and the self-ruled island’s foreign minister has stated that China is exploiting the drills initiated in protest of US House Speaker Nancy Pelosi’s visit to prepare for an invasion. 

The New Zealand dollar was unchanged at $0.6289, while the Australian dollar was somewhat weaker at $0.6977.

Source: Reuters

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