Dollar steadies as eyes turn to US inflation data

The dollar nursed losses on Tuesday ahead of US inflation data that investors hope might show some signs of softening, while the euro rose on hawkish comments from policymakers that rates would need to increase further.

The euro was last up 0.06 per cent to $1.01285, after hitting a nearly one-month high of $1.0198 in the previous session and gaining 0.76 per cent overnight.

Sterling was up 0.01 per cent to $1.1684, after rising 0.86 per cent overnight, the largest daily increase in a month.

The kiwi and the yen also eked out small gains in early Asia trade against a softer dollar.

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US inflation data is due at 1230 GMT and the consensus is for the core inflation rate last month to have risen 0.3 per cent month-on-month, the same as in July. Recent dollar gains have slowed on market expectations that peaking inflation will mean less aggressive interest rate hikes from the Federal Reserve.

As it is, the New York Fed's monthly consumer expectations survey showed on Monday that US consumers' inflation expectations slid further in August on declining gasoline prices.

"The outcome of the CPI is going to be really important for the Fed ... it would probably take an acceleration, a strong outcome in the CPI, to see them hike by 75 basis points," said Kristina Clifton, a senior economist and senior currency strategist at Commonwealth Bank of Australia.

"If we get a reading sort of broadly in line with what the consensus is expecting, we would say they would go for a 50 basis point increase."

However, Fed funds futures still imply a 91 per cent chance of a 75 bp increase at next week's Federal Open Market Committee meeting.

The euro has enjoyed a respite above parity thanks to hawkish noises from the European Central Bank. Last week, five sources close to the matter said Europe's benchmark rate could rise to 2 per cent or beyond.

Officials overnight also reiterated their view that rates would need to keep rising, and it would depend on forthcoming data.

The Ifo institute, in a U-turn from its forecast three months prior, said on Monday that Germany's economy will contract next year because of rising energy costs.

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"We definitely see downside to the euro rather than upside ... we're expecting the euro to pull back down below parity and stay there for quite a while, particularly while all those issues around energy supplies are still at play," said Clifton.

Against the Japanese yen, the dollar eased 0.09 per cent to 142.69, with talk of intervention from Japanese officials giving little support to the sliding currency.

A broad pick up in risk sentiment lifted the Australian and New Zealand dollars 0.6 per cent overnight, but Tuesday moves were slight ahead of the US CPI data.

The Aussie was down 0.12 per cent to $0.6880 in early Asia trade, while the kiwi was flat at $0.6137.

The US dollar index stood firm at 108.2, after falling 0.7 per cent overnight, the largest daily decline since August.