FOREX-Dollar firms before inflation data; euro struggles

Reuters

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

    By Saikat Chatterjee
    LONDON, July 12 (Reuters) - The dollar edged higher to a new
nine-day high on Thursday thanks to a bounce in equities and
concerns that U.S. inflation pressures will pick up, although
worries about an escalation in trade conflict capped gains.
    Stock markets in China  .SSEC  rose more than 2 percent and
the offshore yuan  CNH=D3  climbed half a percent, boosting
appetite for risky assets and pushing the dollar higher,
especially against safe-haven currencies such as the yen
 JPY=EBS  and the Swiss franc  CHF=EBS 
    "Overnight developments in China were quite positive for
risk appetite and expectations in a pick up in inflationary
pressures is boosting the greenback," said Manuel Oliveri, a
currency strategist at Credit Agricole in London.
    The dollar edged 0.2 percent higher to 94.91 against a
basket of its rivals  .DXY , its highest since July. 3. It
rallied half a percent against the yen  JPY=EBS  at 112.56 yen. 
  
    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 some
market watchers say 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.
    After seven rate rises  USFFTARGET=  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.
    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
$1.1657, edging further off a 3 1/2-week high of $1.17905
touched on Monday. 
    Minutes from the European Central Bank's latest minutes
showed that policymakers concluded that the ECB's guidance
should be seen as "open-ended".  urn:newsml:reuters.com:*:nF9N1R401I    
    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; editing by Larry King)
 ((saikat.chatterjee@thomsonreuters.com; +44-20-7542-1713;
Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))

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