Dollar eases as traders gear up for Fed skip By Reuters

By Amanda Cooper

LONDON (Reuters) - The fca supervisiondollar hovered around multi-week lows against the euro and sterling on Wednesday, after unexpectedly soft U.S. inflation data cemented the view that the Federal Reserve will not raise interest rates later in the day.

China's yuan sagged to a 6-1/2-month trough after the central bank cut rates, and as speculation mounts that even more stimulus is on the way to support the sputtering post-COVID economic recovery.[CNY/]

The - which measures the performance of the U.S. currency against six others - was flat at 103.20, after touching its lowest since May 22 overnight at 103.04.

In April, the U.S. consumer price index (CPI) logged its smallest year-on-year increase since March 2021 at 4.0%.

The chances of the Fed raising rates by a quarter point have dropped to below 5%, from around 21% a day earlier, according to the CME Group's (NASDAQ:) FedWatch Tool.

"Going into the meeting, the market is expecting a hawkish hold - unless they surprise us all and hike. It's quite a high hurdle for (the Fed) to deliver a hawkish surprise tonight through rhetoric alone," MUFG strategist Lee Hardman said.

"For us, we think we still can't completely rule out that the dollar could at least try to rally initially on the back of hawkish comments from the Fed or from updates or projections," he said.

The dollar index is heading for its largest two-week drop in two months, having lost 0.8% in value in that time, as the view has taken hold among investors that, while the Fed may be close to the end of its current course of rate hikes, other central banks have further to go.

The Reserve Bank of Australia and the Bank of Canada last week delivered surprise rate rises, while the chances for the Bank of England to deliver a half-point rise when it meets next week have reached 20% after shock wage-growth data on Tuesday.

Unsurprisingly, the dollar has lost the most so far this month against the Australian dollar, which has gained 4.3%, followed by the Canadian dollar, which has risen by 2%.

The euro has been steadily clawing back from 2-1/2 month lows in late May and was last flat at $1.0787. The European Central Bank (ECB) delivers its decision on rates on Thursday, with a quarter-point hike to 3.50% widely expected. Its policymakers have been clear that inflation across the euro zone is too high and the central bank has more work to do.

"In terms of short-term impact, we expect the combination of a hawkish hold by the Fed and a hawkish 25-bp hike by the ECB to leave the euro trading closer to $1.0700 than $1.0800," ING strategist Francesco Pesole said.

"The ECB may struggle more to convey a hawkish message after inflation and growth data came in on the softer side."

Sterling was largely flat at $1.2607, after soaring 0.8% on Tuesday to a one-month high at $1.2625.

The dollar eased 0.2 to 139.90 yen, retreating from a one-week high the day before. The Bank of Japan is expected to retain its ultra-easy policy settings on Friday.

Meanwhile, the hit 7.1785 earlier, its weakest against the dollar since late November. It was last at 7.1686, showing a 0.1% rise versus the dollar.

The People's Bank of China's cut a key short-term lending rate for the first time in 10 months on Tuesday and is widely expected to cut the borrowing cost on medium-term policy loans on Thursday, a Reuters poll showed.

(Additional eporting by Kevin Buckland in Tokyo; Editing by Kim Coghill and Mark Potter)

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