FOREX-Dollar just below recent highs ahead of inflation data

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FOREX-Dollar just below recent highs ahead of inflation data

SINGAPORE Reuters -- The dollar was just below recent highs on Tuesday, as traders waited for U.S. inflation data later in the week, which could take pressure off the Federal ReserveFederal Reserve and put it on the greenback if it suggests that the pace of price rises has peaked.

The data is due on Wednesday and the anticipation is likely to keep things calm until then.

The Aussie held gains of $0.6977. Both the kiwi and the kiwi were close to their 50 day moving averages, leaving them just above their 50 day moving averages.

The euro was just above parity with the continent's energy crisis, which could cause a boost if the dollar weakened, with the pound holding at $1.2081 and holding at $1.2081. The yen went up slightly to 134.75 per dollar. On Friday, Jane Foley, senior currency strategist at Rabobank, said that the Fed might announce a 75 basis point rate hike on September 21 because of the strong U.S. July payrolls report.

She said the July U.S. CPI inflation release is expected to show some moderate inflation pressures later this week. This may be enough for the Fed to relax. Economists polled by Reuters see headline inflation at 8.7% a year-on-year high, but below last month's 9.1% figure.

Money-market futures show traders see a two-thirds chance of a 75 bp hike next month and have started pushing expectations for rate cuts deeper into 2023.

Two-year Treasury yields, which track short-term U.S. rate expectations, were held at 3.2157% on Tuesday, with benchmark 10 year yields 45 bps below that at 2.7572%.

An upside CPI surprise could drive yields and the dollar higher.

Thomas Mathews of Capital Economics said that investors have become increasingly certain thatinflation will drop back fairly quickly, and that it will remain around the Fed's target.

The market is arguably quite vulnerable to a surprise on inflation, should any evidence indicate that it is staying high longer than expected. That would probably prompt a sharper response from the Fed, and see the bond market selloff resume in earnest.