FOREX-Dollar treads water ahead of inflation reports; US rate cut bets intact

By Ankur Banerjee

SINGAPORE, Sept 10 (Reuters) - The U.S. dollar was steady on Wednesday, holding onto overnight gains as traders braced for crucial inflation reports this week that could help define the size and scope of interest rate cuts from the Federal Reserve for next week and beyond.

After a dismal jobs report last week cemented expectations of a rate cut from the Fed at its September 16-17 policy meeting, the only question for investors is whether the magnitude of the cute would be 25 basis points or 50 basis points.

Much of that will depend on the extent of the impact from tariffs on prices in the world's largest economy. U.S. producer price inflation data is due on Wednesday followed by the consumer price inflation report on Thursday.

Traders are fully pricing in a 25 bps cut next week and have ascribed a 5% chance to a 50 bps reduction. They anticipate 66 bps of easing this year.

"The bar for a 50 bp move is high, there would likely need to be a clear downside surprise in core inflation to give doves cover," said Kieran Williams, head of Asia FX at InTouch Capital Markets.

"Given sticky services prices and the Fed’s preference for signalling gradualism, a jumbo cut next week looks unlikely, but the data will shape how aggressively the market prices the easing path into year end."

That left the currency markets in limbo in Asian hours. The euro EUR=EBS eased a touch to $1.16985 after dropping 0.5% in the previous session while sterling GBP=D3 was at $1.3522. The yen JPY=EBS was little changed at 147.42 per dollar.

The Australian dollar AUD=D3 was at $0.6587, hovering near the seven-week high it touched on Tuesday.

The dollar index =USD, which measures the U.S. currency against six other units, was steady at 97.834 after gaining 0.3% on Tuesday. The index is down about 10% in 2025 as erratic U.S. trade policies and rate cut expectations dented the dollar's appeal.

Data on Tuesday showed the economy likely created 911,000 fewer jobs in the 12 months through March than previously estimated, suggesting job growth was already stalling before President Donald Trump's aggressive tariffs on imports.

While the report underscored cracks in the labour market, rate cut bets remained intact as investors looked past the backward looking data, noting that it does not provide any information about job creation since March.

"I think a 50 bp would do more damage than good for sentiment at this point," said Matt Simpson, a senior market analyst at City Index in Brisbane. "Besides, the Fed will want to save face and not fully succumb to Trump's wishes."

"Markets are pricing in three cuts over the next three meetings and the Fed is in a good position to play nicely with those expectations, or increase odds of cuts in 2026 - without succumbing to a 50 bp cut next week," Simpson said.

Investors have also been keeping an eye on politics across the globe, with focus on who will take over from Shigeru Ishiba as Japan's next prime minister as well as France's fifth prime minister in two years amid growing fiscal worries.

Indonesian rupiah IDR= will again be in the spotlight having tumbled 1% on Tuesday after highly respected finance minister Sri Mulyani Indrawati was removed, a move that stunned markets.

Sri Mulyani, known for steering Southeast Asia's largest economy through a host of challenges, was widely regarded as one of the few checks on Prabowo's big growth and spending promises that had unnerved many investors.

"The fundamental risk is now tilted toward fiscal looseness amid growing protests and pressure to fund populist social programs," said InTouch's Williams.

"Without a credible anchor, rupiah remains vulnerable, even as Bank Indonesia's reserves provide a temporary buffer."