Dollar at two-decade high as CPI keeps aggressive US rate hikes likely

A man counts U.S. dollar banknotes at an exchange shop in Beirut, Lebanon March 18, 2022. REUTERS/Mohamed Azakir/Files

TOKYO — The dollar hit a two-decade high on Thursday after U.S. inflation moderated less than markets had expected, keeping the Federal Reserve on course to tighten policy aggressively.

The safe-haven greenback also got support amid a slide in global equities amid investor worries that central banks are behind the curve in trying to rein in consumer prices, with growth already facing risks from China’s prolonged COVID-19 lockdowns.

Riskier currencies like the Aussie and New Zealand dollars sank along with cryptocurrencies.

The dollar index, which measures the buck against six major peers, added about 0.1% to 104.22, hitting its highest since December 2002.

The consumer price index climbed 8.3% on an annual basis in April, easing from 8.5% in March but outstripping the 8.1% estimate of economists.

The data suggested inflation may have peaked, but was unlikely to cool quickly and derail the Fed’s current monetary policy plans.

The market is fully priced for at least a half percentage point increase to the policy rate at each of the next two Fed decisions, on June 15 and July 27, according to the CME FedWatch Tool.

“The stronger-than-expected U.S. inflation print heightened concerns over the need for the Fed to accelerate its policy tightening path,” Rodrigo Catril, senior currency strategist at National Australia Bank, wrote in a client note.

The May CPI data comes five days before the June Fed meeting, and another “shocker” would make a 75 basis-point hike then a “strong possibility,” he said.

The euro was about flat at $1.05095 after receiving a lift overnight as the European Central Bank overnight firmed up expectations that it will raise its policy interest rate in July for the first time in more than a decade.

The single currency plumbed a more than five-year low of $1.04695 at the end of last month.

The yen continued to garner support from an easing in long-term Treasury yields from a multi-year peak above 3.2% at the start of the week.

Japan’s currency added about 0.2% to 129.67 per dollar, pulling further away from the more than two-decade low of 131.35 reached Monday, as the 10-year Treasury yield retreated to an almost two-week low of 2.862% in Tokyo trading on Thursday.

The British pound languished as Brexit headlines returned, with the attorney-general for England and Wales advising the government that it would be within its legal rights to scrap large parts of the Northern Ireland protocol, according to the Times newspaper.

Sterling, which also tends to move with risk assets, dipped to $1.2211 on Thursday for the first time in almost two years.

The Aussie slumped 0.76% to $0.6885 and earlier reached $0.68795 for the first time in almost two years. New Zealand’s kiwi dropped 0.79% to $0.6240, also an almost two-year low.

Bitcoin slid about 8% to $26,645 but stayed above the previous day’s low of $27,757.77, a level not seen since the start of last year.

Smaller rival ether was last down almost 14% at a 10-month trough of $1,785.

“Risk assets will surely not like (the U.S. CPI data) because it means that it remains far too premature to price out hikes in the fed funds curve,” TD Securities strategists wrote in a research note.

“This market is desperate to try to find the put-in risk assets, but this time around, there will be no bailout because central banks are several months too late in tightening.”

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