Dollar drops to two-month low on cooling U.S. inflation
LONDON/SINGAPORE – The dollar fell to a two-month low on Thursday after data showed U.S. inflation slowed sharply in March, bolstering hopes that the Federal Reserve’s rate-hiking campaign is either already finished or will be by May.
Figures released on Wednesday showed that consumer price index (CPI) inflation came it at 5 percent year-on-year in March, down from 6 percent in February.
Yet core inflation – which strips out volatile food and energy prices – picked up to 5.6 percent, from 5.5 percent the previous month.
The dollar dropped after the data was released and weakened further on Thursday, helping the euro rise 0.27 percent to a two-month high of $1.102.
The dollar index, which measures the greenback against six major peer, was last down 0.2 percent at 101.28, its lowest since the start of February. It was on track for its fifth straight weekly drop.
John Hardy, head of FX strategy at Saxo Bank, said the inflation data “left the market with not much to go on”. He said he expects the dollar to grind lower from here as inflation cools and the economy slows.
“It encourages dollar weakness, as long as we don’t get a major recession or a major reheating,” Hardy said. “Nothing massive, we’re just looking for an extension of the weakness.”
The dollar index has dropped almost 12 percent since touching a 20-year high of 114.78 last year, after being driven up by the Federal Reserve’s aggressive interest rate hikes, which made dollar-denominated bonds look attractive.
The sharp slowdown in U.S. inflation in 2023 has caused many investors to hope that the Fed’s rate hikes could soon be over, although the stubbornness of core inflation is causing others to question that narrative.
Minutes from the Fed’s March meeting, also released on Wednesday, showed that several officials considered pausing interest rate hikes after the failure of Silicon Valley Bank. The Fed ended up hiking by 25 bps to a range of 4.75 percent to 5 percent.
Pricing in derivatives markets shows traders think there’s a roughly 70% chance the Fed raises rates 25 bps again in May, and a 30-percent chance it does nothing.
Against Japan’s yen, the dollar slipped 0.19 percent to 132.93, after falling 0.39 percent in the previous session.
New Bank of Japan Governor Kazuo Ueda on Wednesday indicated he was concerned about tightening monetary policy too early and failing to push inflation sustainably to 2 percent.
Britain’s pound was up 0.22 percent to $1.251, in its third straight daily gain.
Data on Thursday showed that the British economy stagnated in February as strikes by public-sector workers hit output.
Meanwhile, the dollar fell to a 26-month low against the Swiss franc at 0.891, down 0.5 percent on the day. The franc is traditionally seen as a safe haven at times of stress.
The Australian dollar rose 0.59 percent to $0.673.