© Reuters. FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
By Karen Brettell
NEW YORK (Reuters) -The dollar jumped against the euro and yen on Wednesday as investors positioned for U.S. and European inflation data due on Thursday, with month-end portfolio rebalancing also likely to sway market direction.
Bitcoin hit a more than two-year high, benefiting from strong overall market liquidity.
Brad Bechtel, global head of FX at Jefferies in New York, noted that foreign exchange volatility picked up on Wednesday, which may be "hedging in front of the inflation data," and also because of month-end flows.
The implied volatility used by banks to price three-month options on the euro against the dollar reached 6.01 on Wednesday, the highest since Feb. 15, and was last at 5.74. Volatility in major currency pairs has been declining, with the euro/dollar measure falling to the lowest since January 2022 on Tuesday.
Traders are focused on data to give further clues on when the Federal Reserve is likely to begin cutting rates. Those expectations have been pushed to June, from May, on strong economic growth, sticky inflation and more hawkish commentary from Fed officials.
Thursday's U.S. Personal Consumption Expenditures release is expected to show that headline prices rose 0.3% in January for an annual gain of 2.4%. The core index is forecast to rise by 0.4% for the month, and 2.8% on the year.
Consumer price data for Germany, France and Spain is also due on Thursday, ahead of euro area figures on Friday.
"There's more chance of disinflation ongoing in the euro area, which perhaps could open the door for an earlier cut from the European Central Bank," said Danske Bank FX and rates strategist Mohamad Al-Saraf.
"We think if inflation is stickier in the U.S. than it is in the euro area, then the dollar has to be strong."
The dollar index was last up 0.12% at 103.96. The euro dipped 0.11% to $1.0832.
Data on Wednesday showed the U.S. economy grew at a solid clip in the fourth quarter with robust consumer spending.
New York Fed President John Williams said that even as there is still some distance to cover in achieving the U.S. central bank's 2% inflation target, the door is opening to interest rate cuts this year depending on how the data come in.
Boston Fed President Susan Collins said the Fed will likely need to start cutting rates later this year.
The yen also weakened against the greenback, approaching the 150.88 level reached on Feb. 13, which was the weakest since Nov. 16.
Strength in the dollar against the yen is "an indicator of carry trades" and reflects "a very 'risk on,' high-liquidity type of environment that seems to be driving FX at the moment," Bechtel said.
Traders will watch for any signs of intervention by the Bank of Japan and Ministry of Finance if the Japanese currency continues to weaken.
The dollar was last up 0.12% at 150.68 yen.
The kiwi dropped 1.23% to $0.6094 after reaching $0.6083, the lowest since Feb. 15.
The Reserve Bank of New Zealand held rates steady on Wednesday, which was in line with forecasts but defied some outlying market bets for a rate rise.
The RBNZ's rate forecast track and commentary were also slightly more dovish than some traders had anticipated.
The Aussie fell 0.75% to $0.6493 after hitting $0.6488, the lowest since Feb. 15.
Australia's consumer price inflation held at a two-year low in January despite forecasts for an uptick, reinforcing expectations that rates are unlikely to increase further.
In cryptocurrencies, bitcoin breached $60,000 for the first time since November 2021 and came close to $64,000, boosted by the launch of new U.S. spot bitcoin exchange-traded products.
Bitcoin was last up 6.5% on the day at $60,334.
