By Yasin Ebrahim
Investing.com – The dollar continued to trade in a narrow range Tuesday, as Federal Reserve officials continued to downplay inflation fears, suggesting accommodative monetary policy will continue as the economy remains far from its goals.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, fell by 0.15% to 89.86.
"While the level of inflation in my near-term outlook has moved somewhat higher, my expectation for the contour of inflation moving back towards its underlying trend in the period beyond the reopening remains broadly unchanged,” said Federal Reserve Governor Lael Brainard.
Data on Friday showed the personal consumption expenditures, or PCE, index, the Federal Reserve's preferred inflation measure, rose 3.1% in the 12 months through April.
The move had a subdued effect on bond yields, which remain steady, adding to downside pressure in the dollar.
But the rapid pace of inflation is not something the Fed can afford to ignore for long, and the central bank will likely be forced to ramp up its inflation forecasts when it rolls out its updated projections at the June meeting later this month.
"[T]he magnitude of the increase has set inflation to run on a higher year-over-year path for the balance of the year … the FOMC will once again need to revise upward its 2021 forecast for core PCE at its June meeting," Morgan Stanley (NYSE:MS) said in a note.
Fed officials have already signaled that the Federal Reserve is preparing to begin discussion on trimming its bond purchases amid signs a stronger-than-expected recovery.
The May ISM Manufacturing Index rose to 61.2 from 60.7 in April, boosted by rising commodity costs and higher prices. That was above economists' forecast for a reading of 61.0.
Still, the Federal Reserve appears in no rush to rein in its current policy measures as unemployment remains above pre-pandemic levels.
“Today employment remains far from our goal,” Brainard added. “Jobs are down by over 8 million relative to their pre-pandemic level, and the shortfall is over 10 million jobs if we take into account the secular job growth that would have occurred over the past year.”
The jobs numbers for May due Friday will give traders another window into the strength of the labor market following a weak report for April.
"At present, consensus shows a rise of 653,000 payrolls in May, following a 266,000 gain the month prior, with the unemployment rate expected to decline from 6.1% to 5.9%, and average hourly earnings expected to increase 0.2% in May and 1.6% over the past 12 months," Stifel said in note.