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Dollar Weakens; Cooling U.S. Inflation Lifts Pressure Off Fed

Published 12/08/2021, 07:34
Updated 12/08/2021, 07:34
© Reuters.

By Peter Nurse

Investing.com - The dollar edged lower in early European trading Thursday, as signs of cooling U.S. inflation relieved the pressure on the Federal Reserve to start reining in its massive bond-buying program.

At 2:15 AM ET (0615 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded around 0.1% lower at 92.898, retreating from Wednesday’s high of 93.195, a level not seen since the start of April.

USD/JPY was flat at 110.41, after pulling back from the five-week high of 110.80 reached overnight, EUR/USD was marginally higher at 1.1741, after falling to a four-month low of 1.1706, while the risk-sensitive AUD/USD fell 0.1% to 0.7365.

The U.S. consumer price index increased 0.5% last month after climbing 0.9% in June, the largest drop in the month-to-month inflation rate in 15 months. Excluding the volatile food and energy components, the CPI rose 0.3% after increasing 0.9% in June. That was the smallest gain in four months and the first deceleration in the so-called core CPI since February.

Fed Chair Jerome Powell has consistently said high inflation numbers will turn out to be transitory as the economy fully reopens, limiting the need to quickly tighten monetary policy, and these figures will provide some support to this view. 

That said, the weakness in the greenback is limited, with many analysts still expecting the Fed to announce a tapering of stimulus this year, potentially as soon as next month.

“Prices continued to rise from the previous month and, on a year-over-year basis, CPI growth remained unchanged at 5.4% (it was expected to slow to 5.3%),” said Kathy Lien, an analyst at BK Asset Management.

“So while Federal Reserve officials may be relieved that price pressures did not accelerate more rapidly, the continued increase in CPI keeps the central bank on track to announce [a] taper in the next six weeks.” 

This point of view was backed up Wednesday by comments from Kansas City Fed President Esther George, who indicated that the standard for reducing the central bank’s bond-buying program may have already been met given the current levels of inflation and recent labor market improvements.

Elsewhere, GBP/USD edged lower to 1.3868 despite U.K. GDP growing 4.8% in the second quarter, a sharp increase on the quarter after the first quarter’s 1.6% drop. 

This report is likely to invigorate discussions about fewer asset purchases from the Bank of England.

USD/TRY fell 0.2% to 8.6079 ahead of a meeting of the Turkish central bank later Thursday. The bank is widely expected to keep its benchmark interest rate steady at 19%, to the likely annoyance of President Recep Tayyip Erdogan, after Turkish consumer inflation climbed more than expected in July.

Turkey’s central bank raised its inflation expectations in its latest quarterly report on July 29 but projected a significant drop in price growth in the final quarter.

 

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