Forex
Dollar gains after US consumer prices rise more than expected
© Reuters. FILE PHOTO: The employee of a currency exchange shop counts U.S. dollar banknotes in Ciudad Juarez, Mexico July 27, 2023. REUTERS/Jose Luis Gonzalez/File Photo
By Herbert Lash
NEW YORK (Reuters) -The dollar rose sharply on Thursday after U.S. consumer prices rose more than expected in September, lifted by an elevated cost of rent that raised the prospect of the Federal Reserve keeping interest rates high for some time.
The Labor Department’s report on Thursday showed the annual increase in consumer prices last month, excluding the volatile food and energy components, was the smallest in two years, but the surprise surge in rental costs rippled across markets.
While many shrugged off the move higher in rental costs, others concluded the Fed’s mission to lower inflation to it’s 2% target isn’t quite there.
“It just drives home the recent narrative that interest rates are likely to stay fairly high for a long period of time until the Fed can really break the back of inflation,” said Douglas Porter, chief economist at BMO Capital Markets in Oakville, Canada.
“Getting inflation back to 2% is not going to be easy.”
The consumer price index increased 0.4% last month, with a 0.6% jump in the cost of shelter accounting for more than half of the rise.
The , a measure of the U.S. currency against six others, jumped 0.85% to 106.550 in its biggest single-day gain since March 15. The dollar rose more than 1% against sterling, and the Australian and New Zealand dollars.
While a close call, the Fed is on course to hike rates one more time, most likely in December, said Bipan Rai, North America head of FX strategy at CIBC Capital Markets in Toronto.
The euro declined 0.85% to $1.0527, while the yen slid closer to breaching the 150 mark, seen as a level Japanese officials may intervene to halt the currency from weakening further. It was last down 0.43% at 149.81 per dollar.
Owners’ equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, rose even though non-official sources show a decline in rental prices.
“Since the Fed makes its decisions based on the official numbers, not on what third party sources are showing, it’s a little bit worrisome,” said Thierry Wizman, Macquarie’s global FX and interest rates strategist in New York.
“Even though September was a blip, I don’t think that it negates the overall picture of the declining inflation. I don’t think that this is going to cause (the Fed) to hike,” Wizman said. “The only thing that the market is missing is that somehow it thinks that the Fed is going to drop high for long.”
The dollar’s recent weakness has been driven by declining Treasury yields as bond prices rallied on the Fed’s softer stance on future rate rises. Bond yields move opposite to their price. The yield on 10-year Treasuries rose 10.6 basis points (bps) to 4.7032%. The benchmark note hit its highest since 2007 last week at 4.887% but dropped sharply this week.
Also in the mix for currency investors on Thursday were sluggish British growth figures, which showed the economy partially recovered in August after a sharp drop in July. The pound initially did not significantly react but later fell 1.15% to $1.2174. The pound was the best performing G10 currency in the first half of this year, thanks to better-than-expected economic data and sticky inflation that drove expectations the Bank of England (BoE) would be increasing rates for longer than most peers. It then had its worst month in a year in September, as those factors reversed, before steadying this month. Thursday’s CPI release came after Wednesday’s mixed report on U.S. producer prices, and minutes from the Fed’s September meeting. Fed officials pointed to uncertainties around the economy, oil prices and financial markets as supporting “the case for proceeding carefully in determining the extent of additional policy firming that may be appropriate,” the minutes showed. The Swiss franc had been set to strengthen for the seventh successive session, the longest streak since July 2020. But the franc retreated, with the dollar up 0.72% at 0.9085.
Investing.com – The US dollar edged lower Thursday as traders eased into the new year, but the greenback remained near the two-year high seen earlier in the week and was likely to stay supported near term given the more hawkish Fed stance and expectations for the incoming Donald Trump administration.
At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 108.215, but remained close to the two-year high touched on Tuesday.
Dollar to remain in demand in 2025
The index rose 7% in 2024 as traders drastically cut back Fed rate-cut expectations in the wake of the projections of the policymakers after the December policy-setting meeting.
The US central bank projected just two 25 bp rate cuts in 2025 at its last policy meeting of the year, a sharp reduction from the four cuts it had indicated in September.
In fact, markets are currently only pricing in 42 bps of cuts from the US central bank in 2025, with the return of Donald Trump to the White House adding a degree of uncertainty given his policies of looser regulation, tax cuts, tariff hikes and tighter immigration are seen as both pro-growth and inflationary.
Focus turns to the release later in the session of weekly numbers as well as the December number, for clues towards the strength of the US economy.
Euro could be heading for parity vs dollar
In Europe, edged 0.1% higher to 1.0364, after dropping more than 6% in 2024.
Data released earlier Thursday showed that manufacturing activity in the eurozone declining at a faster rate at the end of the year, offering scant signals of an imminent recovery.
HCOB’s final , compiled by S&P Global, dipped to 45.1 in December, with the downturn broad-based as the bloc’s three largest economies – Germany, France and Italy – were stuck in an industrial recession.
Traders expected more interest rate cuts from the European Central Bank in 2025, with markets pricing in 113 basis points of easing, much more than the Federal Reserve.
This divergence in Fed & ECB policy “will push the euro to parity vs the dollar in the course of 2025,” said analysts at ABN Amro, in a note.
traded 0.2% lower to 1.2494, having fallen 1.7% last year, but was nevertheless the best-performing G10 currency versus the dollar.
UK rose in December, according to mortgage lender Nationwide, jumping by 0.7% in monthly terms during December, following a 1.2% increase in November.
The resilience of the UK housing market has surprised many given indications of weakening activity across the wider economy, with prices ending the year 4.7% higher than their level of December 2023, up from 3.7% in November – the highest annual growth rate since late 2022.
The held interest rates unchanged last month after consumer prices rose above target, and this central bank is likely to remain more cautious than its eurozone counterpart in 2025.
Slowing Chinese manufacturing growth
In Asia, rose 0.4% to 7.3265, climbing to its highest level in over a year after data showed that the country’s manufacturing sector grew less than expected in December.
The reading came just days after government PMI data also showed weaker-than-expected growth in the manufacturing sector.
The prints ramped up concerns over a slowing economic recovery in China, with recent stimulus measures having provided only limited support.
traded 0.3% lower to 156.82, slipping slightly after surging to a five-month high of nearly 158 in recent sessions on the back of a mostly dovish outlook for 2025 from the Bank of Japan.
Investing.com– Most Asian currencies moved in a flat-to-low range on Thursday as the prospect of slower U.S. interest rate cuts in 2025 kept traders averse to regional markets.
The Chinese yuan was among the worst performers for the day as purchasing managers index data showed support from stimulus measures rolled out in recent months was now petering out.
Regional trading volumes were still limited, as major markets such as Japan remained closed for the New Year holidays.
The dollar remained upbeat, benefiting from expectations of a slower pace of rate cuts by the Federal Reserve in 2025, while protectionist policies under incoming President Donald Trump are also expected to favor the greenback.
The and moved little in Asian trade, but were at their highest levels since November 2022.
Chinese yuan slips as manufacturing PMIs disappoint
The Chinese yuan weakened on Thursday, with the pair rising 0.3% to 7.3190 yuan- its highest level in over a year.
data showed that the country’s manufacturing sector grew less than expected in December as support from recent stimulus measures ran dry.
The reading came just days after data also showed weaker-than-expected growth in the manufacturing sector.
The prints ramped up concerns over a slowing economic recovery in China, with recent stimulus measures having provided only limited support. Increased trade headwinds under Trump are also expected to pressure the Chinese economy, although Beijing is expected to dole out more fiscal stimulus to offset this trend.
Asia FX nurses losses in 2024
Most Asian currencies steadied on Thursday after mostly logging losses through 2024. A bulk of these losses also came in recent months, as the prospect of slower rate cuts and more protectionist U.S. policies saw traders largely favor the greenback.
The Japanese yen was among the worst hit by this trade, as a mostly dovish outlook for 2025 from the Bank of Japan added to pressure on the currency. The yen’s pair moved little on Thursday after surging to a five-month high of nearly 158 yen in recent sessions.
The South Korean won firmed on Thursday, but was among the worst performing Asian currencies in 2024. The won’s pair rose nearly 15% in 2024, with heightened political turmoil in the country adding to pressure on the won.
The Singapore dollar’s pair fell 0.2% on Thursday, benefiting from gross that showed the economy grew more than expected in 2024, at 4%.
But slowed sharply in the fourth quarter, raising doubts over the island state’s economic outlook in the coming quarters.
The Australian dollar’s pair rose 0.5% after sliding to a more-than one-year low, while the Indian rupee’s pair fell 0.3% after hitting a record high of 86 rupees this week.
MEXICO CITY (Reuters) – Mexico’s peso weakened nearly 23% this year to close the final day of trading at 20.82 pesos per U.S. dollar on Tuesday, the currency’s deepest drop against the greenback since the 2008 global financial crisis.
The peso’s volatile year kicked off with months of steady gains until the days following June’s general election, which swept the leftist coalition led by the ruling Morena party to a resounding victory in the presidential race as well as large congressional majorities.
Ahead of the election, the Mexican currency traded in April at about 16.26 pesos per dollar to reach a nine-year high.
The election win for Morena paved the way for passage of constitutional reforms in September, including a major overhaul of the judiciary that critics argue will undermine the independence of the courts in Latin America’s second-biggest economy.
The election of U.S. President-elect Donald Trump in November exacerbated the peso’s rocky ride, amid his fresh tariff threats against Mexico, which sends around 80% of its exports to its northern neighbor.
Mexico’s main stock index also shed value during the year, dipping nearly 14% to close on Tuesday at 49,513 points, its steepest fall since 2018.
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