US dollar index edges up as market looks to inflation data

The dollar edged higher against a basket of its peers on Monday, shaking off earlier weakness as traders moved past an unsurprising loans survey toward other economic data that could provide fresh clues on the Federal Reserve's hiking path.

A quarterly survey of loan officers conducted by the Federal Reserve showed that banks continue to tighten credit and that there is weaker demand for business loans.

Following the survey, the dollar index, which measures the currency against six rivals, rose 0.08% to trade at 101.38, a better showing than the one-year low of 100.78 reached last month.

"People are now going to be able to finally just move forward towards the inflation report and that is probably why we are seeing more dollar strength," said Ed Moya, senior market analyst at OANDA in New York.

Moya said the credit crunch is likely to persist, which could justify recession calls and make Fed speakers anticipate a soft landing might not be possible. "But I think this report is supportive of a lot of the softness with loan demand that stemmed from the Fed's aggressive rate hiking campaign."

The Fed raised interest rates by 25 basis points last week but sounded slightly more cautious than other central banks on the outlook, dropping guidance about the need for future hikes.

So futures traders now see the Fed refraining from a hike in June and for fed funds to fall later in the year. The Fed's target range stands at 5% to 5.25%, having risen rapidly from 0% since March 2022. ,

The loan survey is the first in a series of closely watched U.S. economic data this week. Inflation data due on Wednesday could indicate whether the Fed must do more to rein in inflation. Traders remain watchful of the debt-ceiling impasse on Capitol Hill, with the Treasury Secretary warning the government might be unable to pay debts by June 1.

The euro fell 0.15% to $1.1003, after rallying nearly 16% from September lows, supported by expectations the European Central Bank will keep interest rates high for longer than the Fed. The ECB last week also slowed the pace of its interest rate increases but signalled more tightening to come.

Sterling also fell 0.12% to $1.2614. The pound hit a more than one-year peak against the dollar on Monday, with trading as high as $1.2668, its highest level since April 2022. The pound remains in focus this week ahead of an expected Bank of England rate increase on Thursday, and has also been firming versus the euro.

Elsewhere, the dollar rose 0.2% against the yen to 135.14.