Singapore, May 30, 2010 (FBC) – The dollar weakened against other major currencies on Wednesday after news that US inflation slowed more than expected, raising the possibility that the Federal Reserve may leave interest rates on hold.
Data from the US Labor Department showed that inflation slowed to 4.9 percent in April. However, so-called core inflation remained stuck at 5.5%, suggesting that interest rates may rise for some time to tame the problem.
“The US dollar softened modestly on news that headline US CPI inflation was slightly lower in April. However, the data provides some relief for Fed hawks and doves,” said Jane Foley, head of FX strategy at Rabobank London.
“At 5.5%, core CPI inflation is above the 2% target and will do little to change our perception that the Fed will not cut interest rates this year.”
Following the data, the euro rose 0.24% to $1.0987 and sterling rose 0.14% to $1.2640.
The Japanese yen was last seen at $134.50, a 0.52 percent decrease against the dollar.
Against a basket of currencies, the dollar index fell 0.2% to 101.38, hitting a low of 101.21.
“There is continued anger in the market that the Fed has not completed hiking rates,” said Adam Bouton, chief currency analyst at Forexlive.
“Even if the employment inflation report comes in a little below expectations, you will see relief in the market. That means selling the dollar properly. So … I think the market has been holding its breath before. Report.”
Economists polled by Reuters had expected US consumer prices to rise 5.5% year-on-year in April.
A stronger-than-expected reading would have been a headache for the Fed, which last week signaled it was open to pausing its aggressive tightening cycle after proposing 10 consecutive rate hikes starting in March 2022.
Fed funds futures traders paused ahead of an expected rate cut in September. The Fed’s target range stands at 5% to 5.25%. ,
Button believes it’s too soon to start talking about rate cuts.
“I think the market is ready to move past the inflationary narrative. But what the Fed needs to see before thinking about rate cuts is rising unemployment,” he said.
“I think even if inflation goes down to 2%, the Fed won’t cut rates until it looks like a recession is inevitable or certain. So the growth part of the equation is going to be very important from here to the market and the Fed.”
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Exchange Rate at 10:33AM (1433 GMT)
Reporting by Rae Wee; Editing by Edwina Gibbs
Our Standards: The Thomson Reuters Trust Principles.
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