After hot U.S. CPI data, the dollar swings up and then falls to flat

NEW YORK, (Reuters) – The dollar swung in choppy trading on Thursday as U.S. consumer prices rose above forecast in January. This led markets to increase expectations that the Federal Reserve will aggressively combat soaring inflation.

BUSINESS
11 February 2022 Friday 20:50

After hot U.S. CPI data, the dollar swings up and then falls to flat

According to the Labor Department, December's consumer price index increased 0.6%, while January's 12 month-over-year CPI gain was 7.5%. This is the largest year-over-year increase since February 1982.

This data represented the fourth consecutive month of gains exceeding 6%. It made James Bullard, President of St Louis Federal Reserve Bank, "dramatically more hawkish" he stated.

Initial gains of almost 0.5% were seen in the dollar index. This is a measure of the greenback's worth against six major currencies. The index then dropped to 0.4% before ending almost flat. Last, it was up 0.08%.

Higher interest rates would typically lift the dollar but the market is already sufficient long in dollars, according to Bipan Rai, head FX strategy at CIBC Capital Markets.

Rai stated that markets are eager to profit from long-term positions in long dollars. "The market prices the Fed fairly aggressively, not only for this year, but also for next year."

The likelihood of a 50-basis point interest rate hike was higher than that of a 25-basis point increase, as was expected.

Market participants also looked at how other central banks would combat rising inflation, especially in light of rising commodity prices.

Edward Moya is OANDA's senior market analyst. He said that "this broader, widespread pricing pressures are a global story." "We are starting to notice that many of these advanced economies are becoming more aggressive in tackling the problem of inflation."

After the CPI data were released, rates rose, particularly at the short end. The yield on the two-year U.S. Treasury note, which is usually in line with expectations, rose 26.1 basis point to 1.609%. For the first time in 2 1/2 years, the 10-year Treasury note yield topped 2%.

According to Nancy Davis, Quadratic Capital Management LLC managing partner and chief investment officer, the rates market was questioning how much inflation is happening.

"I don’t believe CPI gives us the complete picture. The forward guidance by the Fed means that the rates market is priced to disinflation.

The Swedish central bank maintained its monetary policy plans in Europe earlier and stressed that the surge in inflation was temporary.

The Riksbank's dovish stance led to the largest gain in the dollar among major currencies. This saw the Swedish crown fall 2.01% against the greenback at 9.31 dollars.

The euro rose 0.1% to $1.1434.

To reach a five-week low, the Japanese yen fell 0.4% to 115.99 dollars. The Bank of Japan announced that it would intervene in the markets and offer to purchase unlimited amounts of Japanese 10-year government bonds at 0.25%.

In cryptocurrency, Bitcoin fell 1.11% to $43,985.20.

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Exchange bid prices at 3:53PM (2053 GMT).

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

Session

Dollar index 95.6370 95.5760 +0.08% +0.027% +96.0130 (+95.1720)

Euro/Dollar $1.1436 $1.1424 +0.12% +0.61% +$1.1495 +$1.1375

Dollar/Yen 115.9950 115.5500 +0.39% +0.76% +116.3300 +115.4800

Euro/Yen 132.66 131.99 +0.51% +1.80% +133.1500 +131.8700

Dollar/Swiss 0.9264 0.9241 +0.25% +1.56% +0.9296 +0.9228

Sterling/Dollar $1.3554 $1.3536 +0.13% +0.22% +$1.3643 +$1.3524

Dollar/Canadian 1.2719 1.2671 +0.39% +0.61% +1.2727 +1.2636