Dollar firms against peers ahead of inflation test

By Brigid Riley

TOKYO (Reuters) -The dollar steadied against peer currencies on Friday after a downward revision to U.S. GDP for the first quarter suggested room for the Federal Reserve to cut interest rates this year, while investors braced for a key inflation report.

Official data showed overnight that the U.S. economy grew at an 1.3% annualised rate from January through March, down from the advance estimate of 1.6% after downward revisions to consumer spending.

The revision keeps the Fed on track to potentially cut rates at least once this year and renewed some hope that those cuts will come sooner rather than later.

Markets currently priced in a 55% chance of rate cuts to begin in September, up from 51% a day before, according to the CME Group’s FedWatch Tool.

U.S Treasury yields, which had boosted the greenback to its highest since May 14 at 105.17 on Thursday as they marched to multi-week peaks, slipped after the release of the GDP data. [US/]

The dollar index consolidated around 104.82 after dipping as low as 104.63 overnight.

While the GDP revision was helpful in adding to signs that growth may be slowing, the Fed will likely need more data before it feels comfortable enough to begin cutting, said Sim Moh Siong, currency strategist at the Bank of Singapore.

“The U.S. economy looks resilient even though there are signs of slowing at the edges… I think the main struggle that U.S. inflation remains sticky hasn’t really changed.”

The market now looks ahead to the release of the Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, for further indications on how the central bank might proceed.

Softer U.S. consumer price inflation data earlier in May rekindled rate cut expectations for this year, weakening the dollar across the board and setting it on track to post its first monthly losses in 2024.

But expectations for interest rate reductions in 2024 have wobbled amid signs of sticky inflation, most recently with a surprise uptick in consumer sentiment in data on Tuesday.

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“It’s all down to today’s PCE inflation report now as to where markets head next… I still think there may be an upside surprise in the PCE report that could quickly reverse Thursday’s moves,” said Matt Simpson, senior market analyst at City Index.

Against the greenback, the yen held around 156.835, remaining off Wednesday’s four-week low of 157.715 per dollar as Japan’s finance minister repeated warnings about excessive currency moves.

Data on Friday showed core consumer inflation in Tokyo accelerated in May but price growth excluding the effect of fuel eased, heightening uncertainty on the timing of the Bank of Japan’s next rate hike.

The yen has steadily marched closer toward the 34-year low of 160.245 from a month ago, a level which market players suspect triggered two rounds of dollar-selling intervention by Tokyo.

Those suspicions may be confirmed when Japan releases official figures on currency intervention in the Asian evening.

The offshore Chinese yuan was flat versus the greenback at 7.2555 after an official factory survey showed China’s manufacturing activity unexpectedly fell in May.

Elsewhere, the euro edged down 0.14% to $1.08165 after touching a two-week low of $1.07885 overnight.

Price data for the euro zone is due later in the day, following a stronger-than-expected April inflation reading for Germany on Wednesday.

Sterling was last trading at $1.2714, down 0.13% on the day, after reaching $1.2801 on Tuesday for the first time since March 21.

In cryptocurrencies, bitcoin last rose 0.04% to $68,494.87.

(Reporting by Brigid Riley; Editing by Stephen Coates)