Dollar moves off lows on heels of inflation data

By Chuck Mikolajczak

NEW YORK (Reuters) – The dollar moved sharply off its lows on Wednesday and briefly turned positive on the day after economic data showed inflation was unlikely to cause the Federal Reserve to adjust their aggressive path of monetary policy.

The consumer price index rose 0.3% last month, the smallest gain since last August, the Labor Department said on Wednesday, versus the 1.2% month-to-month surge in the CPI in March, the largest advance since September 2005.

On an annual basis, CPI climbed 8.3%, higher than the 8.1% estimate but below the 8.5% in the prior month.

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.”

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.

(Reporting by Chuck Mikolajczak; Editing by Alison Williams)