US dollar jumps as CPI beats expectations

THE US dollar jumped against the euro and hit a one-month high against the yen on Thursday (Jan 11) after the latest data showed that consumer price inflation came in above economists’ expectations in December, raising some doubts that the Federal Reserve will cut rates as soon as traders expect.

The headline Consumer Price Index (CPI) rose 0.3 per cent last month, for an annual gain of 3.4 per cent.

That had been expected to be 0.2 per cent and 3.2 per cent, respectively. In particular, prices rose more than expected as rents maintained their upward trend.

“The details of the report will give dovish Fed officials pause,” said Adam Button, chief currency analyst at ForexLive in Toronto.

Traders are pricing in aggressive expectations for rate cuts this year, with the Fed seen as beginning to cut rates in March.

The odds of a March rate reduction, however, fell to 65 per cent from 67 per cent on Wednesday, according to the CME Group’s FedWatch Tool.

Traders expect the US central bank to ease monetary conditions as the US economy weakens and inflation moves back closer to the Fed’s 2 per cent annual target.

But Thursday’s data shows that may not occur as quickly as some expect.

“The question everyone is struggling with is what kind of inflation regime we are in – are we still in a 2010s era of low growth, low inflation and we’re still just working through the end of the pandemic adjustment and then we’re back into that?” Button remarked.“Obviously that’s what the market’s been betting on for the last two months,” he said. “And I think it’s ultimately right, but getting there might not be as quick as anyone would like,” he added.

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The dollar index which measures the currency against six rivals, was last up 0.08 per cent on the day at 102.42. It had traded at around 102.20 before the data was released.

The euro dipped 0.06 per cent on the day to US$1.09630.

The greenback gained 0.13 per cent to 145.97 yen, after earlier reaching 146.10, the highest since Dec 11. REUTERS