Dollar holds firm amid inflation data, rate cut expectations

The dollar held steady against other major currencies on Friday as investors digested the impact of a stronger-than-expected U.S. consumer price index (CPI). In December, CPI increased by 0.3% month-on-month and 3.4% year-on-year, which was better than the expected monthly increase of 0.2% and the annual rate increase of 3.2%.

Despite the higher inflation data, market participants expect the Federal Reserve to cut interest rates, with CME Group’s FedWatch tool showing a 73.2% chance of a 25 basis point rate cut in March, an expectation that includes the possibility of further rate cuts.

Matt Simpson, senior market analyst at City Index, noted the discrepancy between market expectations, actual data and the Fed’s stance. He pointed out that the dollar’s trend does not indicate that those who are short the dollar will retreat.

The U.S. dollar index is around 102.26, down slightly from Thursday’s high of 102.76. However, it remains significantly above the five-month low of 100.61 experienced in December, when markets were actively factoring in multiple rate cuts from the Federal Reserve this year.

Cleveland Fed President Loretta Mester commented on Thursday that recent CPI data suggests the central bank may be premature in lowering its policy rate in March. Likewise, Richmond Fed President Thomas Barkin commented that the data did not provide much clarity on the future trajectory of inflation.

Analysts at Commerzbank said getting inflation back to the final stages of target is proving more difficult. They predict the Fed will not cut interest rates in March as markets currently expect.

In currency trading, the euro was hovering around $1.09 against the U.S. dollar, remaining stronger than the previous day, and the pound was trading at $1.27 against the U.S. dollar, up slightly by 0.07% on the day. The yen was little changed against the dollar at 145.27, although it recovered from Thursday’s low of 146.41, its lowest since Dec. 11.

In cryptocurrency markets, Bitcoin edged up 0.25% to $46,270.00 after rising to a two-year high. The increase comes after the U.S. Securities and Exchange Commission approved the issuance of a Bitcoin-related ETF on Wednesday. Meanwhile, Ethereum hit its highest since May 2022 at $2,690.70 on Thursday before inching down to $2,607.40.

Reuters contributed to this article.

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