FOREX-Dollar near 1 1/2-week highs as U.S. price data eyed

Reuters

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    * Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh

    By Saikat Chatterjee
    LONDON, July 12 (Reuters) - The dollar held at a nine-day
high on Thursday, bolstered by concern U.S. inflation pressures
will pick up, although worries about an escalation in trade
conflict capped gains.
    The conventional wisdom is that any escalation in trade
conflict between the United States and its trading partners will
feed through to inflation and prompt the U.S. Federal Reserve to
raise interest rates at least twice more this year. But market
watchers fear the dollar may have peaked for now.
    With the stimulus effect from U.S. tax cuts expected to 
wane next year and worries that the trade war rhetoric may fuel
a selloff in global stock markets, some analysts advise caution
in buying the dollar at these levels.
    "If stocks drop sharply then the Fed will pause and
moreover, we think the U.S. is towards the end of its rate hike
cycle," said Thu Lan Nguyen, an FX analyst at Commerzbank in
Frankfurt.
    Having raised interest rates  USFFTARGET=  seven times since
December 2015 to 2 percent, markets expect three or four rate
hikes by the end of 2019.
    But despite the widening interest rate differentials in
favor of the dollar -- spreads between 10-year U.S. Treasuries
and equivalent German Bunds are near 30-year highs at 2.59
percent  --  the dollar has failed to power ahead in recent
days, notably against the euro.
    Money managers at Russell Investments believe the risks of a
U.S. recession are rising for late 2019, encouraging the dollar
to hit a near-term peak.
    The dollar gained 0.3 percent to 112.29 yen  JPY=  after
rising as much as 1.3 percent in U.S. trade on Wednesday,
breaching the 112 barrier for the first time since Jan. 10.
    The dollar index against a basket of six major currencies
 .DXY  edged up towards a one-week high of 94.769 reached
overnight, trading at 94.753.
    For now, investors were looking U.S. consumer inflation data
due at 1230 GMT for further clues on when and how fast the Fed
will raise interest rates.
    The biggest annual increase in 6 1/2 years in June U.S.
producer prices, thanks to gains in the cost of services and
motor vehicles, set the scene for an upside surprise in the
consumer price index numbers.  urn:newsml:reuters.com:*:nL1N1U61NG
    The euro  EUR=EBS  lacked momentum, meanwhile, trading at
$1.1675, edging further off a 3 1/2-week high of $1.17905
touched on Monday.    
    Morgan Stanley strategists say the dollar may remain under
pressure as the threat of protectionism rises. Damage to the
profit margins of U.S. companies could prompt global investors
to shy away from U.S. assets.
    They estimate that foreigners own 30 percent of U.S.
corporate debt and 15 percent of U.S. equities.

 (Reporting by Saikat Chatterjee; Additional reporting by Daniel
Leussink in Tokyo, editing by Larry King)
 ((saikat.chatterjee@thomsonreuters.com; +44-20-7542-1713;
Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))

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