NEW YORK: The dollar rose on Thursday after data showed US import prices increased 0.9% last month, a jump that raised market fears that the Federal Reserve’s fight to tame inflation is not done and could delay plans for policymakers to cut interest rates.
The market also was grappling with a drop in the number of Americans filing new claims for unemployment benefits last week that pointed to underlying strength in the US labor market.
The jump in the price index for US imports in April was the largest one-month increase since it rose 2.9% in March 2022, the Bureau of Labor Statistics said. Prices for US imports last declined on a monthly basis in December, BLS said.
“The market is of course very sensitive to signs of inflation from wherever it may come, and the import price series that we got today was meaningfully stronger than expected,” said Brain Daingerfield, head of G10 FX strategy at NatWest Markets in Stamford, Connecticut.
“The Fed wants to see consistent progress in more than just one point. The number we got yesterday - the CPI - was not as bad as feared,” he said. “But I don’t think it was enough to materially change the market’s outlook for the Fed and that’s reflected in the way that the dollar has bounced back today.” The dollar rebounded from a sharp decline against all major currencies on Wednesday when data showed US inflation slowing to 0.3% in April from a month earlier.
The slowing of consumer prices prompted markets to price in the likelihood that the Fed would cut rates twice this year, with the first coming as early as September.
The import price data, however, raised caution as the dollar index, which tracks the currency against six major peers, rose 0.29% to 104.49 after sliding 0.75% on Wednesday. A strong US economy also questions how fast inflation might slow.
“Claims between 200,000 and 250,000 tells you you’ve got a strong labor market,” said Steven Ricchiuto, US chief economist at Mizuho Securities USA in New York.
“The reality is inflation is moderating to 3%. That’s still above target. Maybe you’re jumping to the gun on the inflation story,” he said.
Initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 222,000 for the week ended May 11, the Labor Department said. Economists polled by Reuters had forecast 220,000 claims in the latest week.
Easing labor market conditions and the resumption in inflation’s downward trend have raised the odds of a rate cut in September. The US central bank last month left its benchmark overnight interest rate unchanged in the current 5.25%-5.50% range, where it has been since July.
The dollar dropped 1% against the yen on Wednesday but was up 0.26% on Thursday at 155.28, having fallen as low as 153.6 before weak Japanese growth figures dented the yen.
The Japanese currency has fallen around 9.5% this year as the Bank of Japan has kept monetary policy loose while higher Fed interest rates have drawn money towards US bonds and the dollar. The yen has been particularly sensitive to any widening or closing of the interest rate differential.
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