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Australian dollar calms after inflation jump

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© Reuters. FILE PHOTO: A Japan Yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration

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By Elizabeth Howcroft

LONDON (Reuters) -The U.S. dollar struggled to gain momentum on Wednesday, while the Australian dollar pared gains following a jump on surprisingly strong inflation data, and the Japanese yen edged up ahead of the Bank of Japan rate decision on Thursday.

Currency markets have been generally quiet in recent sessions as investors wait for the U.S. Federal Reserve meeting next week.

Investors are also looking to policy announcements this week from the European, Canadian and Japanese central banks for clues on the outlook for rates against a backdrop of supply-side driven global inflation pressures.

At 1135 GMT, the was little changed on the day at 93.896.

Short-term U.S. Treasury yields spiked overnight as investors bet that inflation would bring forward interest rate rises, and they hovered just below these levels during the European morning session.

Standard Chartered (OTC:) FX analysts wrote in a client note that they expect currency market risk sentiment to be limited until the Fed next week, where “hawkish risks are still under-priced”.

The Australian dollar was flat on the day at $0.7504, having reached as high as $0.7536 overnight after data showed that Australian core inflation sped to a six-year high in September, surprising the market. The data prompted a spike in short-term yields.

The Reserve Bank of Australia meets on Tuesday next week and market pricing is at odds with RBA policymakers’ insistence that there will be no rate hikes before 2024.

“The Reserve Bank of Australia (RBA) might be forced into action after all,” wrote Commerzbank (DE:) analyst Antje Praefcke in a note to clients, referring to rising 3-year yields.

“The market is likely to increasingly assume that the RBA will have to rethink its expansionary monetary policy further due to economic and inflationary developments, which is likely to principally support AUD.”

The U.S. dollar was down around 0.3% against Japan’s yen, with the pair changing hands at 113.76 – still within recent ranges and close to the four-year high of 114.695 the dollar touched against the yen one week ago.

“Short-JPY positions have clearly become a very popular trade among speculators… but it still seems hard to see the yen finding  sustained support at the moment,” wrote ING FX strategists in a client note.

“115.00 in now appears a matter of when, rather than if.”

The Bank of Japan meets on Thursday and is widely expected to downgrade its economic assessment, with markets betting on no rate hike in the foreseeable future.

The Canadian dollar was down around 0.2% at 1.24165 ahead of Canada’s central bank policy announcement later in the session.

The central bank is expected to raise its inflation forecast and to largely end stimulus from its pandemic-era bond buying programme, starting a countdown of sorts to the first interest rate hike since October 2018

The euro was up around 0.1% at $1.1606. The European Central Bank, which meets on Thursday, is expected to take a dovish stance.

The German government cut its 2021 growth forecast for this year, as supply bottlenecks for semiconductors and rising energy costs delay recovery in Europe’s largest economy.

The British pound was down 0.4% against the euro at 84.555 pence per euro as the finance minister unveiled Britain’s budget forecasts.

In cryptocurrencies, bitcoin fell to as low as $58,100.01 – its lowest in a week and a half – in a move attributed to profit-taking following the all-time high of $67,016.50 it reached last week. Since that high, the cryptocurrency has fallen more than 13% but is on track for its best month since February.

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