Dollar mostly flat as market mulls inflation outlook

By Herbert Lash and Iain Withers

NEW YORK/LONDON (Reuters) – The dollar traded little changed against major currencies on Friday as market speculation continues to swirl about the timing of Federal Reserve rate cuts amid signs of cooling yet persistent inflation and a softening U.S. economy.

While consumer prices rose less than expected in April, leading to a risk-on flavor in equity markets, various Fed officials have sounded a word of caution about when rates may fall, limiting the dollar’s decline this week.

The dollar index, which tracks the U.S. currency against six peers, fell 0.03% at 104.46 after earlier trading about 0.3% higher.

Futures markets are pricing in almost 46 basis points, or about two 25 bps of Fed rate cuts by December, but the likelihood of a cut as early as September has slipped.

“It literally might be a handful of CPI reports and a handful of jobs reports before the Fed moves,” said Matt Weller, global head of research at FOREX.com in Grand Rapids, Michigan.

“The market over-reacted perhaps on Wednesday and now we’re seeing a little bit of that over-reaction come off and that inflation could re-accelerate.”

U.S. inflation accelerated in the first quarter amid strong domestic demand after moderating for much of last year. Last month’s slowdown was a relief after data on Tuesday showed a jump in producer prices in April.

Policymakers said on Thursday that still-high inflation warrants keeping rates at current levels and that reaching the Fed’s 2% inflation target will take longer than previously thought.

A surprisingly large 0.9% jump in import prices on Thursday kept inflation worries high as rising import costs will only add to inflationary pressures.

Even though markets are pricing European rate cuts beginning in June, recent data has shown some upside surprises. Germany’s economy grew more than expected last quarter and investor morale is at a two-year high.

Euro zone consumer inflation data on Friday came in at 2.4% year-on-year in April, in line with a Reuters poll.

The euro rose 0.03% against the dollar to $1.0872.

Euro zone policymakers have increased confidence that inflation will ease back to target next year due to easing price pressures, ECB Vice-President Luis de Guindos said on Friday.

Largely disappointing Chinese data on Friday helped keep market risk sentiment in check. Factory output topped forecasts but retail sales slowed and home prices fell at their fastest pace in more than nine years.

Sterling rose 0.21% to $1.2692, while the dollar gained 0.05% on the Japanese yen at 155.455.

In cryptocurrency markets, bitcoin was up 1.7% at $66,6399.

(Reporting by Herbert Lash, additional reporting by Iain Withers and Tom Westbrook in Singapore; Editing by Timothy Heritage and Emelia Sithole-Matarise)