US dollar climbs after US inflation data and tough Fed talk

THE US dollar rose on Wednesday (Feb 15) in the wake of stubbornly high US inflation data, and firm words on interest rates from Federal Reserve (Fed) officials.

US consumer price index (CPI) inflation accelerated month on month in January, rising 0.5 per cent as expected, due in part to higher rental and food costs.

Year-on-year prices rose 6.4 per cent. That was down from 6.5 per cent in December, but above economists’ expectations of 6.2 per cent.

The US dollar climbed against most major currencies on Wednesday, with the euro down 0.14 per cent to US$1.072. The euro touched a 10-month high of US$1.103 on Feb 2, but has since slipped.

“It is a reaction to the CPI data, and also the (recent) tone of Fed officials,” said Jane Foley, head of FX strategy at Rabobank. “The market is now expecting a higher peak for the Fed funds rate than they were expecting even a week or two ago.”

Japan’s yen was off by 0.2 per cent at 133.34 per US dollar. It touched a six-week low earlier in the session at 133.44.

In December, Fed board members’ median projection foresaw interest rates peaking at 5.1 per cent this year.

But interest rate futures markets now price a peak above 5.2 per cent, and traders are becoming less sure that cuts are coming in 2023. Rates currently stand at 4.5 per cent to 4.75 per cent.

Fed officials struck a tough tone on Tuesday.

“With the strength in the labour market, clearly there are risks that inflation stays higher for longer than expected, or that we might need to raise rates higher,” New York Fed president John Williams said in New York.

Deutsche Bank’s economists said they now expect the Fed to raise rates as high as 5.6 per cent, having previously expected a 5.1 per cent peak.

“Inflation is likely to remain too high over at least the next few months,” the bank’s chief US economist, Matthew Luzzetti, said in a note to clients.

The US dollar index, which gauges the currency against its peers, was up 0.25 per cent to 103.51 after closing roughly flat on Tuesday.

Sterling dropped 0.79 per cent to US$1.208 after British inflation cooled more than expected in January to 10.1 per cent, alleviating some of the pressure on the Bank of England to keep hiking rates.

Also on investors’ radars was an announcement by Scottish First Minister Nicola Sturgeon that she would step down after eight years in the job.

The Australian dollar fell 1.2 per cent to US$0.69. Meanwhile, China’s yuan traded onshore hit a more than one-month low at 6.8498 to the US dollar, and was last at 6.839.

Australia’s central bank chief, Philip Lowe, told members of parliament that rates still had a way to rise.

US retail sales figures are due later in the day. REUTERS