Dollar Soft as Cooling US Inflation Brings End in Sight for Fed Rate Hikes

The dollar remained subdued in Asian trade on Thursday after weakening overnight as cooler-than-anticipated U.S. inflation data stoked expectations that the Federal Reserve’s monetary tightening will end next month with one last interest rate hike.

The dollar index, which measures the currency against six major peers, slid 0.6% overnight and was threatening to touch a fresh two month low earlier in the Asian session before clawing back some losses. The index was last up 0.069% at 101.53, and remained on course for its fifth straight week of losses.

The Consumer Price Index climbed 0.1% last month after advancing 0.4% in February, with a decline in gasoline prices offset by higher rental costs. Economists polled by Reuters had forecast the CPI gaining 0.2% in March.

“While disinflation trends continue and broadened across headline, core and supercore measures, the CPI report is hardly an all clear on inflation,” strategists at Saxo Markets said.

Simon Harvey, head of FX analysis at Monex Europe said the data showed that underlying demand within the US economy remains significant enough to sustain inflation above the Fed’s 2% target.

“Not only does this reinforce the need for a further rate hike, but it doesn’t necessarily represent an outlook for domestic demand that is about to capitulate under imminently tightening credit standards and a collapse in consumer sentiment,” Harvey said.

Meanwhile, minutes from the Fed’s last meeting in March showed several Federal Reserve policymakers considered pausing interest rate increases after the failure of two regional banks but concluded high inflation needed to be tackled.

The minutes also showed staff projections of a mild recession later this year.

The Fed raised interest rates by 25 basis points in March and the markets are pricing in 70% chance of another 25 bps hike in May before cutting rates towards the end of the year, according to CME FedWatch Tool.

San Francisco Federal Reserve Bank President Mary Daly on Wednesday said that while U.S. economic strength, labour market tightness, and too-high inflation suggest the Fed has “more work to do” on rate hikes, other factors including tighter credit conditions could argue for a pause.

“Headline CPI decelerated more than expected, while the Fed is near the end of its tightening cycle and growth is not hot but not cold, resulting in a goldilocks-like environment,” said Christopher Wong, a currency strategist at OCBC in Singapore.

Investor attention will now switch to retail sales on Friday to assess how consumer spending has been affected.

The euro was up 0.02% to $1.0991, having touched more than two month high of $1.1005 earlier in the session. The currency spiked 0.7% higher on Wednesday and is set for its fifth straight week as traders wagered that Europe would stay on aa monetary tightening path for longer.

The Japanese yen weakened 0.05% to 133.21 per dollar, while sterling was last trading at $1.249, up 0.07% on the day, having gained roughly 0.5% on Wednesday.

The Australian dollar rose 0.33% to $0.671, after a blockbuster jobs report bolstered the case for another rise in interest rates and pushed bond yields higher.

The kiwi eased 0.08% to $0.622.

In cryptocurrencies, bitcoin last rose 0.41% to $30,091.14. Ethereum was up 0.34% at $1,915.38.

(Reuters)

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