By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -The dollar slipped on Wednesday, a day after rising on hotter-than-expected U.S. inflation data, as investors consolidated gains ahead of this week's economic data that could shed light on when the Federal Reserve might start cutting interest rates this year.
In afternoon trading, the dollar index, which measures the greenback against a basket of six currencies, slipped 0.1% to 102.85. Last week it recorded its biggest weekly decline since early January. This year, however, the greenback has posted gains of 1.5%.
"DXY (dollar index) continues to be largely a bet on Fed easing; in recent weeks there has been growing concern that Fed cuts will be pushed further into 2025 or that inflation will reaccelerate, forcing the Fed to hike again," wrote Skylar Montgomery Koning, director of macro strategy at TS Lombard, in a research note.
"In other words, 'no landing' fears have returned," she added, referring to a scenario in which the U.S. economy avoids recession with above-trend growth and above-trend inflation.
Koning further pointed out that with the U.S. economy consistently outperforming expectations, "the bias is for dollar strength, even if there are bumps along the way."
Markets fretted that inflation could remain sticky for some time. The U.S. consumer price index (CPI) released on Tuesday increased solidly in February, beating forecasts and suggesting some stickiness in inflation.
Although the CPI rose 0.4% in February in line with forecasts, a 3.2% year-on-year gain came in just ahead of an expected 3.1% increase. Core figures also topped estimates.
Markets see little chance of a Fed cut before the summer, but expectations for rate cuts in June have eased only a touch to about a 67% likelihood versus 71% earlier in the week, according to LSEG's rate probability app.
The Fed is expected to hold rates steady at its meeting next week.
Investors are now looking to Thursday's U.S. retail sales data, the producer prices index (PPI) report, and jobless claims for more evidence that the economy is slowing down.
Last week, Fed Chair Jerome Powell said the U.S. central bank was "not far" from gaining the confidence it needs in falling inflation to begin cutting rates.
Karl Schamotta, chief market strategist at Corpay in Toronto, echoed comments by TS Lombard's Koning about the dollar not yet reaching its peak for the cycle.
"A narrow path for further weakness exists under a muddle-through scenario, in which global growth rates remain modestly positive and market surprises are kept to a minimum, but renewed dollar strength remains plausible under a broader range of possible outcomes," he added.