NEW YORK/LONDON: The dollar fell sharply on Thursday after US consumer prices rose less than expected last month and pointed to underlying inflation having peaked, data that markets cheered as it may allow the Federal Reserve to ease up on aggressively hiking interest rates.
The consumer price index rose 0.4% in October to match the prior month’s increase, the Labor Department said. Economists polled by Reuters had forecast the CPI would advance 0.6%.
Excluding volatile food and energy, core CPI increased 0.3% month-over-month after gaining 0.6% in September.
The dollar’s tumble sparked spikes higher in the yen and other exchange rates, stirring speculation the Bank of Japan intervened in markets, which analysts doubted.
“I think this reflects the data. I seriously doubt this is any sort of coordinated intervention move,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets.
“The fact that the core point came lower than expectations is cascading the pain trade here. It is really leading to markets to take profits on net longs that had been built up,” Rai said.
The sharp drop in the dollar was due to the decline in Treasury yields, said George Goncalves, head of US macro strategy at MUFG Securities Americas.
“Everything is reacting to the sharp declines we’re seeing in rates,” he said. “This has been a strong dollar regime. Now people are having a change of heart today” in their view of the market, he said.
At one point, the yen and sterling notched their biggest single-day gains since 2016 and 2017, respectively, as the dollar and Treasury yields plunged.
Fed funds futures priced in a sharp decline in expectations for the Fed’s peak target rate, which fell below 5%. The likelihood of a 50-basis-point hike by the Fed instead of 75 in December rose to 71.5%.
Art Hogan, chief market strategist at B. Riley Wealth in New York, said the softer-than-expected inflation report was acting as a tailwind for markets.
“Every line of the report shows sequential improvement,” he said. “Inflation is clearly moving in the right direction, and that keeps a more hawkish Fed at bay,” he said.
Annual inflation slowed as big increases last year dropped out of the calculation for the index. CPI rose 7.7% in October year-over-year, down from 8.2% the prior month as headline inflation fell below 8% for the first time since February.
“The CPI report has reinforced the sell-off momentum in the dollar,” said MUFG currency strategist Lee Hardman in London.
“It gives the market more confidence that there could be a turn in the inflation cycle and the Fed could slow the rate hike pace in December.” The euro rose 1.61% to $1.0172, while the yen strengthened 3.24% versus the dollar at 141.87 and sterling traded at $1.1676, up 2.82% on the day.
The dollar had been on track for a second consecutive day of strong gains, with investors still waiting for the final results of US midterm elections on Tuesday, which will indicate whether the Democrats retain control of Congress.
The latest results showed Republicans were edging closer to securing a majority in the House of Representatives. Yet control of the Senate hung in the balance after Democrats performed better than expected.
The dollar has surged more than 16% this year but lost some steam in recent weeks on hopes the Fed could begin reducing the size of its rate hikes after four consecutive increases by 75 basis points.
A crisis in the crypto world also hurt investor sentiment, analysts said. The Binance exchange on Wednesday abandoned a bailout deal of rival FTX, leaving FTX Chief Executive Sam Bankman-Fried scrambling to explore all options, with his company on the brink of collapse. Bitcoin rose 10.18% to $17,493.00 after plunging in the previous session to less than $16,000 for the first time since late 2020. It has tumbled more than 60% this year.
FTX’s native token, FTT, was 96% higher for the day at $2.977, though its month-to-date loss stood around 90%.
Comments
Comments are closed.