Dollar extends losses on US inflation data, euro rallies

London

THE US dollar fell further on Thursday (Jan 13) to 2-month lows after US inflation proved weaker than feared in December, prompting investors to cut crowded long positions in the currency.

The euro was a big beneficiary of the move and extended its rise to as high as US$1.1479, up 0.3 per cent on the day, while sterling and the yen also added to their gains.

December's monthly US inflation figures, published on Wednesday, were a fraction higher than forecast and the increase in year-on-year consumer price inflation was as expected at 7 per cent - its biggest jump since June 1982.

Nevertheless, traders do not see these inflation readings as urgently shifting an already hawkish Federal Reserve too much.

With at least 3 rate hikes already in the market price, some investors pared bets on further dollar gains.

The dollar index, which measures the greenback against a basket of rival currencies, fell another 0.2 per cent to 94.782.

"The scale of the dollar sell-off must surely be partially indicative of positioning," MUFG analyst Derek Halpenny wrote in a research note. Halpenny said that so much Fed tightening was now priced in for the next year, expectations for longer-term rate hikes were relatively low, which was keeping the dollar in check.

Elsewhere, sterling, which has been rallying as traders reckon Britain's economy can survive a surge in Covid-19 cases and that the Bank of England is going to hike rates again as soon as next month, rose 0.3 per cent to US$1.3749, its highest since late October.

The currency is up 4.5 per cent from December lows and traders have so far shrugged off a political crisis enveloping Prime Minister Boris Johnson, who apologised for attending a party in the Downing Street garden during a coronavirus lockdown last year.

The central bank of New Zealand has already begun hiking rates, and the New Zealand dollar rallied to US$0.6884, a gain of 0.5 per cent and its strongest since late November.

Australia's dollar, which tends to perform well when broader market sentiment is improving, added 0.4 per cent to US$0.7314.

The Canadian dollar reached a new 2-month high, rallying as oil prices gain, with investors looking past the potential economic fallout of the Omicron variant. REUTERS