Written by Harry Robertson
LONDON (Reuters) – The dollar edged toward its highest since November on Wednesday ahead of the Federal Reserve's interest rate decision later in the day, after Tuesday's data showed further signs of inflationary pressures in the U.S. economy. It rose gradually.
Meanwhile, the yen fell to its lowest since Monday's allegations of interference by Japanese authorities, as traders tested the Treasury's resolve.
The dollar index against six major currencies rose 0.066% to 106.370, after approaching its highest since Nov. 1 at 106.51.
Global markets were slightly sluggish as traders in many countries were closed for May Day and International Labor Day.
The euro fell only marginally to $1.0623, after falling 0.52% the previous day as the dollar strengthened following US data.
U.S. labor cost growth accelerated in the first quarter of this year, with the Employment Cost Index (ECI) rising 1.2%, higher than economists' expectations of 1%, according to figures released on Tuesday.
Investors are holding back on bets on how much the Fed will cut interest rates this year after a series of stronger-than-expected economic data. Traders on Wednesday expected interest rates to be cut by just 29 basis points (bp) through December, down from more than 170 basis points (bp) at the start of the year.
Expectations that interest rates will remain high for an extended period of time have led to a spike in U.S. bond yields, making them more attractive and pushing the dollar higher.
“We continue to see a steady stream of better-than-expected U.S. inflation data,” said Chris Turner, head of global markets at ING. “The employment cost index showed a surprising rise yesterday.''
Pay attention to Powell
The Fed is expected to announce its policy decision at 2pm ET on Wednesday (6pm Japan time), keeping interest rates unchanged at 5.25% to 5.5%, but the focus will be on Chairman Powell's comments on recent indicators.
“Jerome Powell will need to recognize that U.S. price trends have reversed and economic activity remains strong, meaning any easing this year will need to be postponed,” Turner said. Stated.
The Japanese yen fell by 0.08% to 157.92 yen to the dollar, but in the first half it was close to the 158 yen level and has since risen slightly.
Traders cited Japanese authorities' buying of the yen as the catalyst for the yen's sharp rise to 154.4 yen on Monday, after falling to 160.25 yen, its lowest since 1990.
Investors' expectations that Japan's interest rates will remain lower than in the United States has caused the currency to fall by about 12% this year.
Strategists say there is a good chance that Japanese authorities will intervene to boost the currency within days, judging by a repeat pattern of intervention in the second half of 2022.
The pound last traded at $1.2482, down 0.06% on the day and 1.9% since the beginning of the year.
The Swiss franc fell to 0.9223 francs to the dollar on Wednesday, its lowest since October. The franc's fall came after the Swiss National Bank unexpectedly cut interest rates in March.
Bitcoin fell as much as 5% to below $58,000 as investors cut bets on a Fed rate cut this year, hurting interest-rate-sensitive assets such as cryptocurrencies.
(Reporting by Harry Robertson; Editing by Alex Richardson)