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Dollar gains as inflation pressures persist; eyes on central bank meetings

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The dollar climbed on Monday after data on Friday showed US producer prices had risen more than expected last month, pointing to persistent inflationary pressures and a chance the Federal Reserve would keep interest rates higher for longer.

The dollar rose 0.35 per cent against the Japanese yen to 137.05. Against a basket of currencies, the US dollar index eked out a 0.12 per cent gain at 105.18.

The euro was last 0.2 per cent lower at $1.0509.

Sterling fell 0.31 per cent to $1.2229 in Asia trade on Monday, while the Aussie edged 0.34 per cent lower to $0.6773.

The kiwi similarly slipped 0.34 per cent to $0.6393.

The US producer price index for final demand in November was up 0.3 per cent from the previous month and 7.4 per cent from a year earlier, data released on Friday showed, a slight upside surprise from forecasts of a 0.2 per cent and 7.2 per cent increase, respectively.

“There were a little bit of concerns about how inflation would be persistently high and would encourage the Fed to keep policy at a restrictive level for even longer than previously expected,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

Traders were also kept on edge in the run up to key risk events this week, including US inflation data and a slew of major central bank meetings.

The Federal Reserve once again takes centre stage, and is widely expected to raise interest rates by 50 basis points, though focus will be on the central bank’s updated economic projections and Fed Chair Jerome Powell’s press conference.

“If he does talk more about the risks to the economy … I think that will probably be considered dovish by markets and, of course, markets love dovish comments and how the FOMC will pay more attention to downside risks to the economy,” said CBA’s Kong.

The Bank of England and the European Central Bank (ECB) will also meet this week, and each is likewise expected to deliver a 50 bp rate hike.

“ECB officials have been telling us that they care more about the underlying inflation, which has remained elevated,” said Kong of the upcoming ECB meeting.

“If they do hike by 50 bps … they might follow up with some pretty hawkish comments in Lagarde’s post meeting conference.”

Ahead of the FOMC meeting, November’s US inflation figures are due on Tuesday, with economists expecting core annual inflation of 6.1 per cent.

“The market reaction to US inflation surprises has been asymmetric so far in 2022, with downside surprises having a larger effect than upside ones,” said analysts at Barclays.

“The inflation print will likely be the bigger driver of the two, (given) the Fed’s guidance toward smaller hikes,” they added, referring to influences on the US dollar. The offshore yuan eased slightly to 6.9798 per dollar, further pressured by worries over a potential spike in COVID cases as China eases its stringent COVID-19 restrictions.

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