Dollar holds steady after US inflation, Fed rate cut still in sight

The US dollar index held steady on Wednesday (Mar 13) as traders shrugged off hotter-than-expected US inflation and still expected a Federal Reserve interest rate cut in June.

The US consumer price index (CPI) increased solidly in February, beating forecasts and suggesting some stickiness in inflation.

Although the CPI rose 0.4 per cent in February in line with forecasts, a 3.2 per cent year-on-year gain came in just ahead of an expected 3.1 per cent increase. Core figures also topped estimates.

Markets see little chance of a Fed cut before the summer, but expectations for rate cuts in June have eased only a touch to about a 67 per cent likelihood versus 71 per cent earlier in the week, according to the CME Group’s FedWatch Tool.

The dollar index, which measures the greenback against a basket of peer currencies and recorded its biggest weekly decline since mid-December, was 0.01 per cent lower at 102.92.

“The market reaction has been very contained compared with a month ago when inflation surprised by a similar margin,” said Francesco Pesole, FX strategist at ING.

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“It appears that the optimistic message on disinflation sent by Federal Reserve chair Jerome Powell continues to resonate loudly with investors.”

Last week, Powell said the US central bank was “not far” from gaining the confidence it needs in falling inflation to begin cutting rates.

Sterling edged 0.1 per cent higher to US$1.2799 as data showed Britain’s economy returned to growth in January after entering a shallow recession in the second half of 2023.

The euro was also 0.1 per cent higher against the dollar at US$1.0937.

According to the results of a long-awaited European Central Bank framework review, the ECB wants to wean banks off free cash but it will try to do that at a gentle enough pace not to disrupt the financial system or credit creation.

ECB policymaker Francois Villeroy de Galhau said the ECB would probably start cutting rates during the spring, between April and June 21, as “victory” against inflation was in sight.

In the meantime, data showed higher cost of borrowing is denting the eurozone economy, with industrial production decreasing by 3.2 per cent in January from the previous month.

Elsewhere, the dollar was 0.2 per cent higher against the yen at 147.92, after the Japanese currency saw its biggest fall in a month on Tuesday following Bank of Japan governor Kazuo Ueda’s slightly bleaker assessment of the nation’s economy.

Traders are now looking to the initial estimates of spring wage negotiations to be announced on Friday. The results will be crucial for the BOJ’s policy calculations on whether to exit negative interest rates at its meeting on March 18-19.

Expectations are for bumper pay raises, with a number of Japan’s biggest companies already saying they had agreed to fully meet union demands for pay increases.

The country’s largest trade union confederation has demanded pay rises of 5.85 per cent this year, surpassing 5 per cent for the first time in 30 years.

In cryptocurrencies, bitcoin hit a fresh record high of US$73,678. It was last up 2.7 per cent to US$73,000.

Ether was up 2.1 per cent at US$4,032. REUTERS