Dollar drifts near two-week low ahead of inflation data

LONDON: The dollar was little changed but hovering near a two-week low on Thursday following minutes from the last Federal Reserve meeting that showed policymakers taking a cautious stance, as investors awaited key U.S. inflation data.

The dollar index, which measures the U.S. currency against six rivals, was at 105.64, not far from 105.55, its lowest since Sept. 25 that was touched on Wednesday. Fed officials pointed to uncertainties around the economy, oil prices and financial markets as supporting "the case for proceeding carefully in determining the extent of additional policy firming that may be appropriate," according to the minutes released on Wednesday from the Sept. 19-20 meeting.

In recent comments, Fed officials have cited rising bond yields as a factor that may allow them to end the rate hike cycle. Also keeping the mood cautious was a mixed report on U.S. producer prices, which increased more than expected in September amid higher costs for energy products and food. But underlying inflation pressures at the factory gate continued to abate.

"This (PPI data) is a reminder that the last mile of the fight against inflation is going to be a tough one," said Ryan Brandham, head of global capital markets, North America at Validus Risk Management. The report comes ahead of the release later on Thursday of September's U.S. consumer price index data, which is expected to show inflation moderated last month.

A downside surprise to inflation will likely support the case for the Fed to have finished its tightening cycle, thereby pulling down U.S. yields and the dollar, according to Carol Kong, a currency strategist at Commonwealth Bank of Australia. "On the flip side, an upside surprise will likely encourage markets to reprice higher the chance the Federal Open Market Committee will follow through on its projected 25 basis point hike."

Futures markets are pricing in a 26% chance of a 25 basis point (bps) hike at the December meeting and a 9% chance of a 25 bps rise at the November meeting, according to the CME FedWatch tool. The dollar's recent weakness has been driven by declining Treasury yields as bond prices rallied on the Fed's softer stance on future rate hikes. Bond yields move opposite to their price.

The yield on 10-year Treasury notes was down 2.4 basis points to 4.573%. It hit its highest since 2007 last week at 4.887%. "At these levels, the argument that higher bond yields are doing the Fed’s work for it start to look a bit thin," said Rob Carnell, ING's regional head of research for Asia-Pacific.

"This is all rather circular, since if we want to use this argument for no hike in November, then we might need to see yields rising again." The euro was up 0.08% at $1.0628, after touching an over two-week high on Wednesday.

Two influential European Central Bank policymakers said on Wednesday the central bank has made progress in getting inflation back down to target, but new shocks could still require the bank to resume a now-paused tightening cycle. The Japanese yen was mostly flat at 149.16 per dollar, while sterling was last at $1.2317.

The Australian dollar rose 0.09% to $0.6419, while the kiwi eased 0.09% to $0.6014.