Dollar holds firm against yen, major peers on strong U.S. inflation

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© Reuters. Illustration photo of a U.S. Dollar note

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By Saikat Chatterjee

LONDON (Reuters) – The dollar held at a nine-day high on Thursday, bolstered by concern U.S. inflation pressures will pick up, although worries about an escalation in trade conflict capped gains.

The conventional wisdom is that any escalation in trade conflict between the United States and its trading partners will feed through to inflation and prompt the U.S. Federal Reserve to raise interest rates at least twice more this year. But market watchers fear the dollar may have peaked for now.

With the stimulus effect from U.S. tax cuts expected to wane next year and worries that the trade war rhetoric may fuel a selloff in global stock markets, some analysts advise caution in buying the dollar at these levels.

“If stocks drop sharply then the Fed will pause and moreover, we think the U.S. is toward the end of its rate hike cycle,” said Thu Lan Nguyen, an FX analyst at Commerzbank (DE:) in Frankfurt.

Having raised interest rates seven times since December 2015 to 2 percent, markets expect three or four rate hikes by the end of 2019.

But despite the widening interest rate differentials in favor of the dollar — spreads between 10-year U.S. Treasuries and equivalent German Bunds are near 30-year highs at 2.59 percent — the dollar has failed to power ahead in recent days, notably against the euro.

Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh

Money managers at Russell Investments believe the risks of a U.S. recession are rising for late 2019, encouraging the dollar to hit a near-term peak.

The dollar gained 0.3 percent to 112.29 yen after rising as much as 1.3 percent in U.S. trade on Wednesday, breaching the 112 barrier for the first time since Jan. 10.

The against a basket of six major currencies () edged up toward a one-week high of 94.769 reached overnight, trading at 94.753.

For now, investors were looking U.S. consumer inflation data due at 1230 GMT for further clues on when and how fast the Fed will raise interest rates.

The biggest annual increase in 6 1/2 years in June U.S. producer prices, thanks to gains in the cost of services and motor vehicles, set the scene for an upside surprise in the consumer price index numbers.

The euro () lacked momentum, meanwhile, trading at $1.1675, edging further off a 3 1/2-week high of $1.17905 touched on Monday.

Morgan Stanley (NYSE:) strategists say the dollar may remain under pressure as the threat of protectionism rises. Damage to the profit margins of U.S. companies could prompt global investors to shy away from U.S. assets.

They estimate that foreigners own 30 percent of U.S. corporate debt and 15 percent of U.S. equities.

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