Dollar on guard; BOJ speculation keeps yen supported

US dollar rate index news: The dollar held broadly steady on Tuesday ahead of key US inflation data due later in the day, while the yen firmed near a one-month high on mounting expectations the Bank of Japan could exit negative interest rates as early as next week.

Against the dollar, the euro retreated from a roughly two-month high hit last week and last bought $1.0931. Sterling rose 0.08 per cent to $1.2822, though was similarly some distance away from Friday's more than seven-month peak.

Currency moves were subdued and the greenback halted its recent decline ahead of a reading on US inflation out later on Tuesday that will provide further clarity on how soon the Federal Reserve could commence its rate easing cycle this year.

While expectations are for core consumer prices to have risen 0.3 per cent on a monthly basis in February, investors will be looking closely for any upward surprises as was the case in January, which could derail the pace of expected Fed rate cuts.

"Were we to get a 0.2 per cent, I think the market will be back on the scent of a possible May first Fed rate cut, and if we were to get a 0.4 per cent, I think the market will be casting some doubt on a cut as early as June," said Ray Attrill, head of FX strategy at National Australia Bank (NAB).

"So in that sense, I think it's right to think that there will be a high degree of market sensitivity to anything other than a 0.3 per cent core print." The Australian dollar rose 0.01 per cent to $0.6615, while the New Zealand dollar edged 0.02 per cent lower to $0.61685.

The dollar index was little changed at 102.80, having hit a roughly two-month low of 102.33 last week. The fall in the greenback has come on the back of rising bets the Fed could begin cutting rates by June, particularly after comments from Fed Chair Jerome Powell last week cemented those expectations.

Jobs data released on Friday also showed that underlying labour market conditions in the world's largest economy were softening as the unemployment rate increased to a two-year high of 3.9 per cent in February.

BOJ SHIFT

Over in Asia, swirling speculation that the BOJ could move away from its ultra-easy policy settings at its policy meeting next week kept the yen supported. Against the dollar, the yen steadied at 146.94, not far from Friday's one-month top of 146.48.

The Japanese currency also rose to a one-month top of 188.01 against the British pound and held near that level on the euro. The BOJ's lack of purchases of Japanese exchange-traded funds on Monday despite a sharp fall in domestic shares also added to expectations of an imminent pivot.

Japan has for years run negative short-term interest rates and a massive stimulus programme including bond and asset buying in a bid to reflate its economy.

"We're still sceptical that we will see a big move next week," said NAB's Attrill. "There is a possibility that they do something with YCC (yield curve control)... but a move away from negative rates, I think, should probably wait for the April meeting where there'll be a little bit more information available. "But it's hard to ignore all the smoke signals coming... we have to take that as meaning that it may be a little sooner than we thought."

Still, the lack of clear signals from Japanese policymakers and authorities kept investors guessing, with the country's Finance Minister Shunichi Suzuki saying on Tuesday the country was not at a stage where it could declare deflation as beaten.

The one-week implied volatility on dollar/yen, which measures expectations for price swings in the currency pair, jumped to 11.66 per cent on Tuesday, its highest level since January.