Dollar takes a breather ahead of US CPI

Net U.S. dollar long positions against other G10 currencies stood around $31.5 billion last week.

The dollar took a step back from its tariff-driven rally, leaving it below recent peaks as traders waited on U.S. inflation data and news on the broader trade front.

Early on Wednesday the dollar was 0.3% firmer and above 153 yen for the first time in a week, but elsewhere it was nursing modest losses and traded at $1.0357 per euro.

Overnight the European Union, Mexico and Canada condemned Donald Trump’s decision to impose 25% tariffs on steel and aluminium imports and the European Commission head Ursula von der Leyen said there would be counter-measures.

Federal Reserve Chair Jerome Powell gave the first part of his twice-yearly testimony to Congress and stuck to the view that the Fed is in no hurry to lower interest rates.

The euro rose 0.5% on Tuesday and was last steady while sterling rose about 0.7% and hovered at $1.2441 early in the Asia session on Wednesday. The Australian dollar had climbed 0.3% and held at $0.6294 in morning trade. [AUD/]

Investors have assumed U.S. tariffs would be positive for the dollar, by reshaping trade flows and encouraging other countries to weaken their currencies to offset the taxes.

However, analysts say inflation implications are less clear cut and that it is hard to say where the chips will fall as tariffs and retaliatory actions take effect – leaving a market that was already heavily long the dollar unwilling to push it higher, for now.

”I don’t see any strong catalyst,” said Imre Speizer, currency strategist at Westpac in Auckland. He said markets may also be vulnerable to a surprise either way when U.S. inflation data is published at 1330 GMT.

Economists polled by Reuters expect core CPI to increase slightly to 0.3% for January and businesses have already started laying the groundwork for future tariff-driven price rises.

A rate cut in the U.S. is not fully priced until September and only 35 basis points of easing are priced in for this year.

”A stronger (inflation) number could price that out even further,” said Speizer. ”I wouldn’t be surprised if that pushed it out to next year.”

Net U.S. dollar long positions against other G10 currencies stood around $31.5 billion last week.

The tariff-hit Canadian dollar was firm and near its strongest levels for the year so far at C$1.4293 per dollar, even as a White House official said steel tariffs would stack on top of a threatened blanket 25% levy on Mexico and Canada. The Mexican peso and other emerging market currencies remain under pressure and near to deep recent lows.

Vietnam’s dong had made a record trough on Tuesday, squeezed by concerns a sizable trade surplus with the U.S. and big trade flows from China could invite tariffs.