The dollar index, which had touched a four-session low of 103.37 ahead of the report, immediately strengthened to a session high of 104.13 in the wake of the data, just below the two-decade high of 104.19 reached on Monday. “Far stronger than expected, especially on the core measure, suggests that underlying inflation pressures remain quite strong and quite persistent,” said Karl Schamotta, chief market strategist at Cambrdige Global Payments in Toronto. “The dollar is just steamrolling everything else and risk appetite is getting demolished here, we have seen equity indices sell off sharply, your high-beta or commodity-linked currencies are selling off as well and that flight to the dollar is continuing here.”
After economic data showed inflation was unlikely to lead the Federal Reserve to change its aggressive monetary policy path, the dollar rose strongly from its lows on Wednesday and briefly went positive on the day. The consumer price index increased 0.3 percent last month, the weakest increase since August, according to the Labor Department, compared to a 1.2 percent month-to-month increase in March, the highest increase since September 2005. CPI rose 8.3% on an annual basis, higher than the 8.1 percent forecast but lower than the 8.5 percent in the previous month.
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Still the dollar was choppy and moved back from its highs and last fell 0.279% at 103.640, with the euro up 0.23% to $1.0551. The greenback has climbed more than 8% this year as investors have gravitated towards the safe haven on concerns about the Fed’s ability to tamp down inflation without causing a recession, along with worries about slowing growth arising from the war in Ukraine and rising COVID-19 cases in China.
After the Fed raised its benchmark overnight interest rate by 50 basis points last week, the largest hike in 22 years, investors have been attempting to assess how aggressive the central bank will be. Expectations are completely priced in for another hike of at least 50 basis points at the central bank’s June meeting, according to CME’s FedWatch Tool https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html?redirect=/trading/interest-rates/fed-funds.html. Investors will get another look at inflation data on Thursday in the form of the producer price index for April, with expectations of a monthly increase of 0.5% versus the 1.4% jump in March. On an annual basis, expectations are for a jump of 10.7% compared with the 11.2% surge the prior month.
The euro gained as European Central Bank has firmed up expectations that it will raise its benchmark interest rate in July for the first time in more than a decade to fight record-high inflation, with some policymakers even hinting on Wednesday at further hikes after the first. The Japanese yen strengthened 0.08% versus the greenback at 130.33 per dollar, while sterling was last trading at $1.2357, up 0.28% on the day. In cryptocurrencies, bitcoin last fell 4.35% to $29,651.09, after falling below $30,000 for the first time since July on Tuesday. Ethereum last fell 4.54% to $2,220.88.
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