US dollar drops as inflation below economists’ expectations

THE US dollar dropped sharply on Wednesday (Apr 12) after data showed US consumer prices rose less than expected in March, raising expectations that the Federal Reserve is likely to stop hiking rates after a possible increase in May.

The Consumer Price Index (CPI) climbed 0.1 per cent last month, below economists’ expectations for a 0.2 per cent gain, and down from a 0.4 per cent increase in February. In the 12 months through March, the CPI increased 5.0 per cent, the smallest year-on-year gain since May 2021. The CPI rose 6.0 per cent on a year-on-year basis in February.

Excluding the volatile food and energy components, the CPI increased 0.4 per cent last month after rising 0.5 per cent in February. Sticky rents continued to drive core CPI.

“Headline inflation coming down more than expected is backing the view of the Fed being basically one more and done,” said Joe Manimbo, senior market analyst at Convera in Washington, DC.

“The market was just really cautious ahead of the data, as if it had been hotter than expected it might suggest that June might also be a live meeting. But I think with inflation taking a big step down from 6 per cent to 5 per cent, if that sustains, that could give the Fed leeway to cut rates later this year if we see a sharp slowdown in the economy,” Manimbo added.

The US dollar index was last at 101.68, down 0.41 per cent on the day and below the level of around 102.11 before the data. The euro reached US$1.09900, the highest since Feb 2, and was last at US$1.0967, up 0.48 per cent on the day. The US dollar dipped to 133.04 Japanese yen, from around 133.85 before the data.

Fed funds futures traders are pricing in 69 per cent probability that the Fed will raise rates by an additional 25 basis points at its May 2-3 meeting, down from around 76 per cent before the data.

Retail sales data on Friday will be analysed next for how consumer spending is being affected by higher prices.

The Fed will release minutes from its Mar 21-22 meeting later on Wednesday. REUTERS