Dollar edges higher, but set for weak quarter ahead of key inflation data

By Peter Nurse

Investing.com - The U.S. dollar edged higher in early European trade Friday, but looks set to record a second consecutive quarterly loss ahead of key U.S. inflation data.

At 03:00 ET (07:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 101.860, not far off its lowest level since early February.

The index is down 1.3% year to date, extending a 7.7% fall in the fourth quarter of 2022.

The turmoil in the U.S. banking sector, primarily, has resulted in traders reassessing their view of future Federal Reserve moves, and now see U.S. interest rates as close to peaking which would erode the dollar's yield advantage.

However, this view is dependent on there being signs that the Fed is winning its battle against inflation.

The Fed's favorite gauge of inflation, the core PCE price index, is due later in the session, and is expected to show that the index, which strips out energy and food prices, will rise 0.4% from the prior month and 4.7% for the year through February.

EUR/USD traded largely flat at 1.0901, after disappointing German retail sales, but having gained 0.5% on Thursday after robust German inflation figures reinforced expectations that the European Central Bank still has rate increases to announce this year.

Euro zone CPI for March is due for release later in the session, and there could be upside to the expected 7.1% annual rise given Thursday’s German numbers release.

GBP/USD rose 0.1% to 1.2392, after data showed that Britain's economy grew in the fourth quarter of last year, with GDP increasing 0.1% from the previous three months after shrinking by 0.3% in the third quarter, a smaller contraction than previously thought.

"The economy performed a little more strongly in the latter half of last year than previously estimated, with later data showing telecommunications, construction and manufacturing all faring better than initially thought in the latest quarter," ONS statistician Darren Morgan said.

Risk-sensitive AUD/USD traded flat at 0.6706, USD/JPY rose 0.4% to 133.12, while USD/CNY fell 0.1% to 6.8645 after data showed that overall Chinese business activity grew at its fastest pace in over a decade, even if the recovery was uneven as service sector activity grew more than expected while growth in the manufacturing sector slowed from the prior month.