Dollar edges up as U.S. inflation data poses quandary for Fed
The dollar edged higher on Tuesday as traders set aside a fairly strong reading of consumer price data and tried to gauge whether the Federal Reserve will hike interest rates next week after the collapse of two banks sparked widespread market unease.
The dollar index , a measure of the dollar against six other currencies, rose 0.096% as Treasury yields jumped a day after the two-year note, which moves in step with interest rate expectations, fell the most in a single day since 1987.
The euro eased 0.11% to $1.0717, but the dollar gained against the safe-haven yen and Swiss franc.
Fed funds futures also showed a change in mood as the strong likelihood the Fed would stand pat at the end of its two-day policy meeting on March 22 dissipated, with that probability falling to 13.6%, according to CME’s Fed Watch Tool.
Investors are mixed on whether the still solid rise in inflation will push the Fed to raise rates again next week after the collapse of Silicon Valley Bank and Signature Bank caused turmoil in financial markets.
Higher U.S. interest rates than that of foreign government debt has been a driver of dollar strength this year.
“The Fed’s near-term decisions are more likely to be guided by financial markets and really what the financial system needs, rather than what the inflation mandate requires,” said Brian Daingerfield, co-head of G-10 FX strategy at Nat West Markets.
“Independent of the financial conditions moves that we have seen, this number is one that was pretty strong,” he said, referring to the CPI print.
The Consumer Price Index (CPI) rose 0.4% last month after accelerating 0.5% in January. In the 12 months through February, the CPI increased 6.0%, a slower pace than the 6.4% annualized gain in January, but still far off the Fed’s 2% target.
Americans faced persistently higher costs for housing rents and food last month, posing a dilemma for the Fed after banking stocks were hammered following the failure of the two banks.
“It’s very clear before the recent stress in financial markets that we’ve had, that this number being strong could potentially push the Fed to go more aggressively at this meeting, 50 basis points,” Daingerfield said.
“But the expectation has clearly changed. The market is viewing this number as a bit more backward looking,” said.
Futures priced in a Fed rate cut by year’s end, with the terminal rate at 4.45% in December, down from more than 5% last week.
The Japanese yen weakened 1.05% at 134.62 per dollar, while the greenback rose rose 0.32% against the Swiss franc.
Sterling was down 0.16% at $1.2162 after jumping 1.22% on Monday. Data on Tuesday showed UK pay growth slowed in the three months to January.
Currency bid prices at 10:28 a.m.(1428 GMT)
Source: Reuters (Reporting by Herbert Lash; additional reporting by Harry Robertson in London; Editing by Andrew Heavens and Angus MacSwan)