Dollar calms down as eyes turn to US inflation data

The dollar extended losses on Tuesday ahead of US inflation data that investors hope will show signs of softening, while the euro rose on hawkish comments from policymakers that rates will need to rise further.

The euro was last up 0.06% to $1.01285 after hitting a near one-month high of $1.0198 in the previous session and gaining 0.76% overnight. Sterling was up 0.01% to $1.1684 after rising 0.86% overnight, the biggest daily gain in a month. The kiwi and yen also made small gains against a softer dollar in early trade in Asia. US inflation data will be released at 1230 GMT and the consensus is for the core inflation rate to have risen 0.3% m/m last month, the same as in July. Recent gains in the dollar have been slowed by market expectations that a peak in inflation would mean less aggressive rate hikes by the Federal Reserve. The New York Fed's monthly survey of consumer expectations showed on Monday that US consumers' inflation expectations slipped further in August due to a drop in gasoline prices. Kristina Clifton, senior economist and senior currency strategist at Commonwealth Bank of Australia (OTC:CMWAY), said: "The outcome of the CPI will be really important for the Fed... "It will probably take an acceleration in CPI, a strong result, to see them do a 75 basis point hike," she said. "If we get a reading that's broadly in line with consensus expectations, we could say they'll go for a 50 basis point hike." Fed funds futures, however, still point to a 91% chance of a 75 basis point hike at next week's Federal Open Market Committee meeting. The euro took a breather above the pair thanks to hawkish noises from the European Central Bank. Last week, five sources close to the matter said Europe's benchmark rate could rise to 2% or above. Overnight, officials reiterated their view that rates should continue to rise and that it depends on the data coming in. Germany's economy will contract next year due to rising energy costs, the Ifo institute said on Monday, a U-turn from its forecast three months ago. Clifton said, "We definitely see a downward trajectory in the euro rather than an upward one... We expect the euro to fall back below parity and stay there for a while longer, especially with all these issues going on with energy supply," Clifton said. Against the Japanese yen, the dollar fell 0.09% to 142.69 as rumors of intervention by Japanese authorities offered little support to the currency's decline. A broad-based uptick in risk sentiment pushed the Australian and New Zealand dollars 0.6% higher overnight, but Tuesday's moves were muted ahead of US CPI data. The Aussie was down 0.12% at $0.6880 in early Asian trade, while the kiwi was flat at $0.6137. The US dollar index was steady at 108.2 after falling 0.7% overnight, the biggest daily drop since August. Follow Global Economic Developments on Social Media! Click here to follow Ieconomy official Facebook account! Click here to follow Ieconomy official Instagram account! Click here to follow Ieconomy official Twitter account!