Dollar Rises as Emerging Signs of Inflation Bolster Rate Outlook

Updated on
  • U.S. core consumer prices jump most in more than four years
  • Bloomberg greenback gauge set for first weekly gain in a month

The dollar gained versus most of its major peers as an economic report showed U.S. inflation climbing, boosting the case for further interest-rate increases this year.

The greenback touched a two-week high versus the euro as an index of core consumer prices advanced last month by the most in more than four years. Federal Reserve Bank of Cleveland President Loretta Mester said Friday that the CPI report bolstered her projection that inflation will eventually return to the Fed’s 2 percent target.

The U.S. central bank is scrutinizing inflation for signs the economy is ready for another interest-rate boost, after lifting the benchmark target for the first time in almost a decade in December. Volatility in global stock markets and a string of lackluster reports at home have dented expectations for further rate increases, casting doubt on the sustainability of a recovery in the U.S., as a strong dollar and the low price of oil further sap price pressure.

“The Fed has to start twisting the market’s arm to recognize the policy risks here, and that should be U.S. dollar supportive,” said Shaun Osborne, chief foreign-exchange strategist in Toronto at Bank of Nova Scotia. “The market has more or less priced out all risk of any move this year. That doesn’t look right if the economy is growing near or above trend, inflation is picking up, and labor markets are tightening.”

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, is poised for its first weekly gain in a month. It rose less than 0.1 percent as of 10:51 a.m. in New York, lifting its weekly advance to 0.3 percent. The U.S. currency was little changed at $1.1108 per euro, after touching its strongest since Feb. 3. 

Inflation Flickers

After remaining stubbornly below the Fed’s target, flickers of inflation are stirring. A jobs report earlier this month showed average hourly earnings rose more than forecast in January, while Friday’s release showed core inflation advanced 2.2 percent from a year earlier.

Traders have reduced the likelihood of a rate increase by year-end to 45 percent, from 93 percent at the end of last year, futures contracts show. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new target range after the next increase.

“The U.S. data came in on the positive side and that’s been good for the dollar,” said Sireen Harajli, a currency strategist at Mizuho Bank Ltd. in New York. “After somewhat of a turbulent week, we’re seeing some calm.” Mizuho is looking for two Fed rate increases this year.