Dollar Edges Lower Ahead of Key Inflation Readings

The US dollar declined in early European trading on Tuesday, while the euro rose ahead of the release of key inflation readings later this week, which will provide further signals on global interest rates. The dollar retreated during the past week but still trades not far from its highest levels in the last three months, as traders anticipate the Federal Reserve to keep interest rates at elevated levels longer than expected at the beginning of the year.

Jeffrey Schmidt, the president of the Federal Reserve Bank of Kansas City, became the latest official on Monday to warn that the central bank is not in a hurry to start lowering interest rates early. Schmidt, in his first extensive public remarks since taking office last August, stated, “With inflation above target, tightening labor markets, and strong demand showing significant momentum, my view is that there is no need for a preemptive policy adjustment.”

The Core Personal Consumption Expenditures (PCE) Price Index is scheduled for release on Thursday, and the currency market is likely to see limited trading ranges ahead of the data release. This data is widely regarded as the preferred inflation gauge by the Federal Reserve. Economists expect an increase of 0.4% for January, following a 0.2% increase in the previous month. A more stable reading than anticipated may lead the Federal Reserve to postpone interest rate cuts further.

The yen benefited from inflation data as the US dollar declined against the Japanese yen. The yen was one of the best-performing currencies during the day after the Consumer Price Index came in slightly higher than expected for January. While the reading still indicates a decline in inflation, it takes into account increasing expectations that the Bank of Japan will raise interest rates in April.

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