SINGAPORE Reuters -- The euro hovered above parity on Wednesday ahead of U.S. inflation data, with traders wary of a sky-high reading that could cause it to fall to lows not seen in decades.
Markets are not happy with the Reserve Bank of New Zealand, which sets policy at 0200 GMT, with economists expecting a 50 basis point interest rate hike.
The New Zealand dollar, which hit a two-year low of $0.6097 on Monday and was up to $0.6119 in early trade, is vulnerable to a further drop if the central bank's statement is more focused on risk to growth rather than inflation.
The common currency is down nearly 12% this year and is as low as $1.0005 on Tuesday as Europe's eastern edge has triggered an energy crisis that has hurt the continent's growth outlook. It was the last time it bought $1.0030.
Economists predicted that the U.S. inflation accelerated to 8.8% year-on-year in June, a 40 year high, which is likely to reinforce expectations of interest rate hikes in response and help the dollar in a market nervous about rates and growth.
"I think the U.S. dollar will keep increasing if the U.S. CPI is stronger than expected," said Joe Capurso, strategist for Commonwealth Bank of Australia in Sydney. There is a very good chance that the euro falls below parity tonight. The euro fell below parity on the Swiss franc last month and is flirting with a drop below its 200 day moving average against the pound.
Weakness in the euro and yen has vaulted the U.S. dollar index higher, and it has made a two-decade peak of 108.560 this week, hovering at 108.220 in early trade on Wednesday.
The Bank of Japan sticks to its ultra-easy monetary policy in contrast to tightening almost everywhere else this year, and has taken a beating on the Japanese yen this year.
It was under pressure at 136.95 per dollar on Wednesday after hitting its lowest since 1998 at 137.75 on Monday.
The Australian dollar dropped 0.2% to $0.6746, just above a two-year trough of $0.6712 made on Tuesday. The AUD sterling has slipped on the stronger dollar and analysts think it is adrift after the resignation of British Prime Minister Boris Johnson last week. GBP bought $1.1877 last year, with gross domestic product data due at 0600 GMT the next hurdle, as traders expect May to bring zero growth.
Eight conservatives are vying to replace Johnson.
The combination of slow growth, debt and high inflation is going to be very hard for the new Tory leadership, said Jane Foley, senior strategist at Rabobank.
The jury is still out as sterling investors are hoping for a government less distracted by scandal and more focused on coherence around the post-Brexit economy.
The pound may suffer from a lack of fresh direction until the new PM is in place. The South Korean won was a bit firmer in morning trade after the central bank raised interest rates by 50 basis points, in line with market expectations.
In Wellington, where the central bank has been in the habit of surprising markets, investors are fairly certain that a hike is coming and are focused on the tone of the statement.
Westpac analyst Imre Speizer said that our dovish scenario includes a 50 bp hike and a statement that emphasises the downside risks to the global economy, and that we expect it to knock the kiwi half a cent lower and push down near-term rates.