After data showed that underlying U.S. consumer price inflation rose less than expected last month, the dollar fell across the board on Tuesday. It added to speculation that the Federal Reserve will slow the pace of its rate increases when it concludes its two-day meeting on Wednesday.
A six-month low for the dollar versus the euro was reached after the release of the data. Last seen at $1.0648, 1.1% higher, the euro hit $1.0666, its highest level since June.
The U.S. dollar fell to a one-week low of 134.67 yen against the yen and was last trading at 134.94 yen, a loss of 1.9 per cent.
The Dollar Index, which tracks the value of the U.S. dollar in relation to six major currencies, dropped 1.1% to 103.82.
Despite decreases in the price of gasoline and used cars, headline consumer prices in the United States rose modestly on an annual basis in November, according to data, marking the smallest annual increase in inflation in nearly a year. With a 7.7% increase in October behind it, the CPI increased 7.1% in the 12 months through November, the lowest gain since December 2021.
Without the effects of increases in the price of food and energy, the CPI rose 0.2% in November, following a 0.3% increase in October. The so-called core CPI rose 6.0% in the 12 months through November, following a 6.3% increase in October.
According to Richard Flax, chief investment officer at Moneyfarm in London, “as a starting point, it’s a positive signal that inflation has gradually moved lower from very high levels to where central banks would like it to be.”
“In a longer-term perspective, it shows that it is a long process, but still, it’s another data point to suggest that inflation will begin to come down towards the targeted 2%, and that should be positive for households and positive for risky assets.”
Against commodity currencies, the dollar also saw significant declines.
At its highest point against the dollar, the Australian dollar was worth US$0.6879, a 1.9% increase. The value of the New Zealand dollar increased to US$0.6490, a 1.7% increase from its previous level. The U.S. dollar dropped 0.5% against the Canadian dollar to C$1.3555.
The report lent credence to the widely held belief that the Fed will announce a smaller-than-expected rate increase on Wednesday.
Futures contracts on the federal funds rate have already discounted to a terminal rate of 4.8%, the point at which the Fed will halt its rate hikes for May. It had been around 5.1% at the end of the previous month, so that was a significant drop.
According to Moneyfarm’s Flax, “the consensus view is that the peak rate is maybe a little bit below 5% which we believe will be reached sometime in the second quarter of next year.”
“We broadly subscribe to the view that markets are expecting a relatively quick shift from the Fed from having raised interest rates till now to cutting rates over a relatively short time period. Our perspective is that the market is pricing in the possibility that the Fed stays at its peak rate for a little bit longer.”