THE US dollar fell to a two-month low on Thursday (Apr 13) after data showed that US inflation slowed sharply in March, bolstering speculation the Federal Reserve’s (Fed) rate hiking campaign is either already finished or will be by May.

As the US dollar slipped, the euro rose to within a whisker of a one-year high, with traders betting that the European Central Bank’s (ECB) fight against inflation still has a way to go.

Figures released on Wednesday showed US consumer price index (CPI) inflation came in at 5 per cent year on year in March, down from 6 per cent in February.

Core inflation – which strips out volatile food and energy prices – picked up to 5.6 per cent, from 5.5 per cent the previous month.

The US dollar dropped after the data was released, and weakened further on Thursday, helping the euro rise to a two-month high of US$1.1032 – just off the one-year peak of US$1.1034 touched in early February. The euro was last up 0.2 per cent at US$1.101.

The US dollar index, which measures the greenback against six major peers, fell to 101.2, its lowest since the start of February. It was on track for its fifth straight weekly drop and last stood 0.15 per cent lower at 101.33.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

“We have seen a dramatic swing in interest differentials in favour of the euro,” said Ben Laidler, global markets strategist at eToro.

“The combination of falling US inflation and rising recession risks has driven expectations of three Fed interest rate cuts this year compared to further hikes from the still-hawkish ECB.”

Expectations that interest rates and bond yields will stay high in the eurozone but fall in the US is making the euro look more attractive, analysts said.

Minutes from the Fed’s March meeting, also released on Wednesday, showed that several officials considered pausing rate hikes after the failure of Silicon Valley Bank. The Fed ended up hiking by 25 basis points (bps) to a range of 4.75 per cent to 5 per cent.

Yet ECB officials look set to keep raising rates. Sources told Reuters that the consensus is converging on a 25 bps increase in May, although more “hawkish” rate-setters such as Austria’s Robert Holzmann are pushing for 50 bps. The main interest rate currently stands at 3 per cent.

Eurozone bond yields rose sharply on Wednesday, narrowing the gap between German and US 10-year borrowing costs to its smallest in two years.

The US dollar was little changed against Japan’s yen at 133.19, after falling 0.39 per cent 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 per cent.

Britain’s pound hit a 10-month high of US$1.253. It was last up 0.2 per cent at US$1.251, on track for its third straight daily gain.

Data on Thursday showed the British economy stagnated in February as strikes by public sector workers hit output.

Meanwhile, the US dollar fell to a 26-month low against the Swiss franc at 0.8898. The franc is traditionally seen as a safe haven at times of stress.

John Hardy, head of FX strategy at Saxo Bank, said he expected the US dollar to grind lower from here as inflation cools and the economy slows.

“It encourages US 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.”

Pricing in derivatives markets shows traders think there’s a roughly 70 per cent chance the Fed will raise rates by 25 bps again in May, and a 30 per cent chance it does nothing. They expect rates to fall to around 4.375 per cent by the end of the year.

By contrast, traders expect the ECB’s main interest rate to peak at around 3.7 per cent by November. REUTERS