Dollar to keep cooling down no matter how hot US inflation runs

Currency traders may be looking forward to a far more relaxed time than other markets counterparts around Wednesday's US inflation data amid expectations that any upside in price pressures would fail to sustain gains in the dollar.

That's because investors are convinced the Federal Reserve is close to the peak of its tightening cycle even in the most hawkish of scenarios. The dollar struggled to rally even after last week's stronger-than-expected payrolls drove up Treasury yields.

"We expect the US dollar to weaken as the US growth and interest-rate premium relative to the rest of the world erodes in the coming months," Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management wrote in a note.

The Bloomberg Dollar Spot index has tumbled almost 10% since it reached a record high in September, as the Fed slowed its pace of interest-rate hikes. The euro and the British pound surged over the past month as traders expect central banks there will lift cash rates over the coming six months, while the Fed is likely to remain on hold before reducing borrowing costs later this year.

"The dollar's downtrend could stall a bit in the short-term, aided by the expectations of another Fed hike next month," analysts at TD Securities led by Mark McCormick, wrote in a note. "We continue to expect a deeper dollar correction in the months ahead, so would use any rallies as opportunities to resell it."

Bond and equities fear gauges have climbed this week as investors brace for the potential that Wednesday's CPI release will set off rapid swings in those markets. In contrast, the dollar's downward trend is seen extending despite the data with JPMorgan's gauge of developed market currency volatility declining for a second straight week.