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The dollar edged down on Tuesday, but remained in tight ranges against peers, ahead of key inflation data from major economies this week that could inform the global interest rate outlook.
The greenback was also on the verge of its first monthly decline in 2024.
"A backdrop where the Federal Reserve can start cutting rates this year, even in December, is consistent with further dollar weakness," said Athanasios Vamvakidis, global head of forex strategy at BofA, who mentioned some weakness in U.S. economic data and recent stronger than expected figures from the euro zone as the main drivers of the dollar slowdown.
He also highlighted that the Fed had pushed back against speculation about possible rate hikes, preventing the dollar from appreciating further.
Markets are currently more than fully priced for a U.S. rate cut in December. They also discount an 80% chance of such a move in November and a 60% chance in September. FEDWATCH
Against a basket of currencies, the dollar =USD was down 0.11% to 104.44, for a 1.7% decline on a monthly basis.
The euro EUR=EBS was up 0.16% to $1.0876 despite some dovish comments from European Central Bank (ECB) policymakers on Monday and data showing German business morale stagnated in May.
ECB's Francois Villeroy de Galhau confirmed market expectations that, barring major surprises, a first rate cut next week is a done deal. But investors have recently updated their bets on future ECB moves, pricing in less than a cut in every quarter in 2024 and early 2025.
German inflation data due on Wednesday and the wider euro zone's reading on Friday will be watched for clues on how soon easing from the central bank could come.
All of that data, however, will be a sideshow to the main focus for markets on Friday when the U.S. core personal consumption expenditures (PCE) price index report - the Federal Reserve's preferred measure of inflation - is released. Expectations are for it to hold steady on a monthly basis.
"The market is well priced for a benign number, and that needs to be delivered ... for current Fed cut expectations for this year to be sustained," said Rodrigo Catril, senior FX strategist at National Australia Bank.
"Any number that surprises on the topside, we think, will provide quite a big reaction in terms of a move up in U.S. yields and for the dollar to rip higher."
The yen JPY=EBS languished near 157 per dollar and last stood at 156.67 per dollar.
"Such a scenario (of the Fed cutting rates in 2024) will be consistent also with a strengthening of the yen versus the greenback," BofA Vamvakidis said.
However, if markets should discount a Fed that "starts easing its policy in 2025, the yen could test the 160 level again, and more interventions by Japanese authorities will be likely," he added.
The Bank of Japan's (BOJ) three key measurements of underlying inflation all fell below 2% in April for the first time since August 2022, data showed on Tuesday, heightening uncertainty over the timing of its next interest rate hike.
That comes ahead of Friday's Tokyo inflation data, a leading indicator of nationwide figures.
BOJ Governor Kazuo Ueda said on Monday the central bank would proceed cautiously with inflation-targeting frameworks, noting that some challenges were "uniquely difficult" for Japan after years of ultra-easy monetary policy.
Sterling GBP=D3 and the New Zealand dollar NZD=D3 both rose to over two-month highs. They last bought $1.2783 and $0.6165, respectively.
The Aussie dollar AUD=D3 edged 0.15% higher. Australian monthly consumer price index data is due on Wednesday.
In cryptocurrencies, bitcoin BTC= slid 2.6% to $67,778, while ether ETH= fell 0.9% to $3,853.50.
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