The dollar held on to recent gains ahead of a busy week for events in the US, culminating in new Federal Reserve chairman Ben Bernanke's maiden semi-annual testimony on monetary policy this Wednesday. Markets are betting Bernanke will come up with rhetoric that is hawkish on inflation, thereby propping up the dollar. But with markets already pricing in a few more interest rate increases, the dollar is vulnerable too.
"With a fair amount of further tightening now priced by interest rate markets, the dollar could be vulnerable if he seeks to send a more dovish message and emphasise risks to growth rather than signs of continued momentum and price pressures," said Daniel Katzive at UBS.
Analysts at CALYON believe that the Fed funds rate would hit 5 pct from 4.50 pct at present -- and they contend that markets are increasingly sharing this view.
"With the Fed still concerned about the inflation threat from rising resource utilization rates in the labour and product market, Bernanke will likely endorse this view," said Daragh Maher at CALYON.
He believes this relatively hawkish tone will sit well with the data releases this week which include an expected surge in US retail sales which may well contribute to a rebound in first quarter GDP growth. More strong US data is expected this week. The Philly Fed consumer confidence index is expected to gain ground in the preliminary reading for January.
While all these bode well for the dollar, its rally of late suggests much may already be in the price, added Maher. The dollar also gained on the yen with one dollar buying just over 118 yen.
However, continued speculation about the possibility of policy tightening from the Bank of Japan helped the yen stay well-bid. In the UK, a rise in producer prices helped staunch the pound's losses although the UK currency continued to languish under the 1.74 usd level.
In data out this morning, it was revealed that rises in crude oil and metal prices caused input prices to jump in January, while output price growth picked up to a four-month high as manufacturers passed on some of these price gains.
The office of National Statistics said input prices rose by 1.8 pct in January from December on a seasonally adjusted basis, well above analysts' expectations for a more moderate rise of 1.3 pct. Meanwhile, between December and January, output prices, on a non-adjusted basis, rose by 0.4 pct -- the biggest monthly gain since September last year -- after a 0.2 pct drop in December.