By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The dollar rose to a six-week high against the yen and climbed from a roughly two-week low against a basket of major currencies on Tuesday as data for January showing the smallest annual increase in U.S. consumer prices since October 2021 did not alter market expectations that interest rates will remain elevated for some time.

The greenback initially fell across the board following the inflation report, but recovered as U.S. Treasury yields rose as well.

“This morning’s inflation data wasn’t as bad as some had feared – so we did see a bit of a relief rally in risk-sensitive currencies after the print – but it also wasn’t sufficient to reverse expectations for further tightening in the months ahead,” said Karl Schamotta, chief market strategist at Corpay in Toronto.

“Core prices continue to rise at an uncomfortable pace, making (Fed Chair) Jerome Powell’s ‘higher for longer’ message seem more persuasive,” Schamotta added.

The Labor Department’s Consumer Price Index increased 0.5% last month after gaining 0.1% in December, data showed. Monthly inflation was boosted in part by rising gasoline prices, which increased 3.6% in January.

But in the 12 months through January, the CPI grew 6.4%, the smallest gain in about 1-1/2 years, and followed a 6.5% rise in December. The annual CPI peaked at 9.1% in June, which was the biggest increase since November 1981.

In early afternoon trading, the dollar rose 0.5% against the yen to 132.41 yen, after earlier hitting a six-week peak of 133.305 yen.

The dollar index, which measures the greenback against a basket of major currencies, was flat at 103.21. It dropped as low as 102.50, its weakest level since Feb. 3

The euro gained 0.1% to $1.0737, hitting a roughly two-week high of $1.0805 after the data.

The dollar also rose 0.2% versus the Swiss franc to 0.9216 francs.

“The narrative remains unchanged that the Fed will eventually slow down,” said Adam Sarhan, chief executive officer at 50 Park Investments in New York. “It is: raising rates, stop raising rates and then possibly cut rates down the road in the future and avoid a hard landing, completing their goal of a soft landing.”

Futures tied to the Fed’s policy rate stuck to bets on Tuesday that the U.S. central bank will raise interest rates at least two more times. The futures contracts pricing showed traders are betting heavily that the Fed will raise rates by a quarter of a percentage point at each of its meetings in March and May.

The current target range for the Fed’s benchmark overnight interest rate is 4.50%-4.75%. The peak federal funds rate is seen hitting 5.272 in July.

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Currency bid prices at 1:43PM (1843 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 103.2400 103.2100 +0.04% -0.242% +103.5200 +102.5000

Euro/Dollar $1.0734 $1.0725 +0.10% +0.19% +$1.0805 +$1.0707

Dollar/Yen 133.0150 132.4100 +0.46% +1.46% +133.3050 +131.5000

Euro/Yen 142.79 141.98 +0.57% +1.77% +142.9400 +141.5300

Dollar/Swiss 0.9211 0.9197 +0.18% -0.36% +0.9233 +0.9139

Sterling/Dollar $1.2178 $1.2141 +0.32% +0.72% +$1.2268 +$1.2120

Dollar/Canadian 1.3347 1.3333 +0.11% -1.48% +1.3390 +1.3273

Aussie/Dollar $0.6982 $0.6966 +0.24% +2.44% +$0.7029 +$0.6922

Euro/Swiss 0.9887 0.9858 +0.29% -0.08% +0.9893 +0.9849

Euro/Sterling 0.8814 0.8831 -0.19% -0.34% +0.8848 +0.8804

NZ $0.6340 $0.6359 -0.24% -0.09% +$0.6389 +$0.6298

Dollar/Dollar

Dollar/Norway 10.1270 10.0985 +0.23% +3.14% +10.2090 +10.0630

Euro/Norway 10.8750 10.8191 +0.52% +3.63% +10.9387 +10.8186

Dollar/Sweden 10.3576 10.3733 -0.08% -0.48% +10.4069 +10.2495

Euro/Sweden 11.1187 11.1274 -0.08% -0.28% +11.1499 +11.0630

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Ed Osmond, Will Dunham and Paul Simao)