Dollar holds gains ahead of inflation data; Aussie awaits RBA

By Kevin Buckland

TOKYO (Reuters) -The U.S. dollar held steady on Tuesday, with markets braced for a key consumer inflation report later in the day that could shape expectations for Federal Reserve interest rate cuts.

The Australian dollar was steady hours before a policy decision by the Reserve Bank of Australia.

The U.S. dollar index – which measures the currency against six counterparts, including the euro and yen – was steady at 98.497 as of 0046 GMT, after advancing 0.5% over the past two sessions.

Prior to that, the dollar had retreated as U.S. President Donald Trump’s dovish-leaning pick to replace a Fed governor, and similarly inclined potential candidates for chairman, led traders to increase easing bets.

In addition, Fed officials have sounded increasingly uneasy about the labour market, signalling their openness to a rate cut as soon as September.

Cooling inflation could cement bets for a reduction next month, but if signs emerge that Trump’s tariffs are fuelling price pressures, that might keep the central bank on hold for now.

Traders currently put the odds of a quarter-point cut on September 17 at about 89%.

“Risk-reward heading into U.S. CPI this week is for a modest USD bounce as any upside surprise will challenge market pricing of almost a full cut by September,” TD Securities strategists wrote in a research note.

“A downside surprise, on the other hand, is unlikely to move Fed pricing and the USD as much,” they said.

“The reasoning is that for the Fed to consider an outsized cut of 50 basis points, the catalyst will be further deterioration in the labour market and not a downside CPI miss.”

Economists polled by Reuters expect core CPI to have risen 0.3% in July, pushing the annual rate higher to 3%.

The greenback rose 0.1% to 148.28 yen on Tuesday. The euro was flat at $1.1615.

The dollar on Monday largely ignored Trump’s signing an executive order extending a pause in sharply higher tariffs on Chinese imports for another 90 days, a move that some market participants said was expected.

With the United States and China seeking to close a deal averting triple-digit import tariffs, a U.S. official told Reuters that chip makers Nvidia and AMD had agreed to allocate 15% of China sales revenues to the U.S. government, aiming to secure export licences for semiconductors.

The yuan was flat at 7.1935 per dollar in offshore trading.

The Aussie fetched $0.6518 , little changed from Monday with economists and investors widely expecting a quarter-point rate reduction from the RBA, after second-quarter inflation came in weaker than expected and the jobless rate hit a 3-1/2-year high.

However, the risk of a surprise has been amplified by a change in decision-making at the central bank, and many traders were caught out when the policy board refrained from lowering rates last month.

Cryptocurrency bitcoin was unchanged at around $118,845, after it climbed as high as $122,308.25 on Monday that took it close to the all-time peak of $123,153.22 from mid-July.

(Reporting by Kevin Buckland; Editing by Jacqueline Wong)