Most currency watchers think that any USD rally is likely to prove temporary, given the market’s mounting concerns over the US current account deficit, which stands at around 6 pct of GDP, and expectations of a narrowing in the yield differential between the US and its major competitors.

The US currency has fallen heavily over the past month or so amid growing concern about global economic imbalances, and speculation that US interest rates are near a peak at 5.00 pct and signs of reserve diversification by world central banks.

Expectations of an imminent Fed pause contrast with predictions of tighter monetary policy from the European Central Bank (ECB) and the Bank of Japan.

This morning’s news of a fall in German consumer prices in May did little to alter expectations that the ECB is on track to raise its key refi rate another quarter point to 2.75 pct at its rate-setting meeting next week.

Official figures showed the annual CPI in Germany, the euro zone’s largest economy, rising by 1.9 pct in May, lower than the 2.0 pct recorded in April.

Meanwhile, US inflation data Friday afternoon added very little to the US rate debate. Core inflation — as measured by the personal consumption expenditure price index, which excludes food and energy — rose 0.2 pct in April, as expected, after a 0.3 pct gain in March. Core inflation rose 2.1 pct in the past 12 months, the fastest gain since March 2005.

Core inflation is now running slightly above the Fed’s informal ‘comfort zone’ of 1-2 pct. But the Fed is more concerned about what inflation will do than what it has done.

The PCE reading ‘is fairly neutral’, said Ronald Simpson, currency strategist at research firm Action Economics.

‘This one piece of data is not going to determine what the Fed does at its next meeting,’ he added.

The market will be closely monitoring this week’s FOMC minutes from the May 10 meeting, along with US payrolls on Friday as the up and coming events that may provide some guidance about whether the Fed will raise rates in June.

SOURCE: AFX