Dollar Strengthens Amid Inflation Concerns, Fed’s Patient Stance

On Thursday, the dollar saw moderate gains in volatile trading, with concerns over persistent inflation reinforcing expectations that the Federal Reserve will postpone interest rate cuts this year, despite weaker-than-expected March U.S. producer prices.

Fed officials, addressing the public on Thursday, reiterated the necessity for a patient approach in adjusting monetary policy, providing support for the dollar.

According to data released on Thursday, the producer price index (PPI) for March rose by 0.2% month-on-month, falling slightly short of economists’ expectations of a 0.3% increase. Year-on-year, the PPI recorded a 2.1% rise, compared to an estimated 2.2% gain.

Although the dollar initially dipped following the release of the PPI figures, it later rebounded. The market barely responded to separate data showing 211,000 U.S. initial jobless claims for the week ended April 6, slightly lower than the forecast of 215,000, as investors remained focused on inflation concerns.

The PPI report came on the heels of a stronger-than-expected consumer price index (CPI) released on Wednesday, which showed a 0.4% increase on a monthly basis in March, exceeding expectations for a 0.3% rise.

Thierry Albert Wizman, global FX and rates strategist at Macquarie in New York, commented, “The CPI has done enough damage to the outlook for an earlier rate cut. We may have to live with that in order to get three more months of low inflation, and that means a cut is delayed.”

In afternoon trading, the dollar remained steady against the yen at 153.23 yen, after briefly slipping below 153 yen following the PPI data. The dollar index, measuring the greenback against six major currencies, edged up 0.1% to 105.26 (=USD). Against the Swiss franc, however, the dollar retreated by 0.3% to 0.9098 francs.

Following the PPI data, the U.S. rate futures market has priced in a roughly 69% chance of a Fed rate cut in September, as indicated by the CME’s FedWatch tool. This timeline emerged after Wednesday’s hotter-than-expected consumer price index last month. Previously, rate futures had anticipated a rate cut in June.

Karl Schamotta, chief market strategist at Corpay in Toronto, noted, “Market-implied rate expectations haven’t budged materially from yesterday’s levels, and extraordinarily wide rate differentials are keeping the U.S. dollar elevated.”

Meanwhile, the euro slipped 0.1% to $1.07026, falling to a two-month low of $1.0699 after the European Central Bank confirmed its decision to maintain interest rates at a record high of 4%, but signaled readiness for a potential cut.

In contrast to expectations of imminent rate cuts, New York Fed President John Williams emphasized that the central bank does not presently require an adjustment to monetary policy, given the current state of the economy. Richmond Fed President Thomas Barkin echoed similar sentiments, stating that recent data did not enhance confidence in easing price pressures across the broader economy.

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