Dollar weakens after CPI shows cooling inflation

NEW YORK/LONDON: The US Dollar (USD) weakened against major peers on Wednesday after cooler-than-expected data eased fears that inflation was accelerating and increased the chances the Federal Reserve could cut interest rates twice this year.

The Bureau of Labor Statistics showed consumer prices rose 2.9% in the 12 months through December, in line with economists’ expectations. Core inflation, which excludes food and energy prices, came in as expected, but lower than the previous month.

Softer core reading coupled with producer prices data on Tuesday triggered an immediate decline in the dollar.

The dollar index , which measures the greenback against six other units, fell 0.2% to 109.02, pulling it further away from the 26-month high of 110.17 it reached on Monday.

“While markets had previously scaled back expectations for Fed easing, they responded to this data by pricing in more rate cuts for this year,” said Uto Shinohara, senior investment strategist at Mesirow Currency Management in Chicago.

“The dollar has shown heightened sensitivity to economic news in both directions recently … as well as from recent tariff rhetoric.”

President-elect Donald Trump returns to the White House next week, and analysts expect some of his policies to boost growth as well as increase price pressures.

Meanwhile the dollar was last down 1% on the Japanese yen at 156.41 yen.

The yen strengthened on Wednesday after comments from the Bank of Japan Governor Kazuo Ueda, who said the central bank would raise interest rates and adjust the degree of monetary support if improvements in the economy and price conditions continue.

Meanwhile, a cooling in British inflation offered relief to the pound. Data showed inflation slowed unexpectedly last month and core measures of price growth – tracked by the Bank of England – fell more sharply – welcome news for finance minister Rachel Reeves after a market selloff.

The British pound was up 0.3% at $1.2247 against the dollar in the U.S. morning session.
Helen Given, associate director of trading at Monex USA in Washington, said the outsized moves in the pound and yen pairs are driven more by news out of the other nations rather than the U.S.

“We don’t see it as likely, though, that Fed easing expectations will move forward any further at least until the central bank can get a handle on what the incoming administration’s trade and economic policies will do to domestic inflation, but we could start to get some answers on scope and scale of these policies as soon as next week,” Given said.

Elsewhere, the euro slipped 0.1% to $1.0299 .

Eyes were also on China, where the onshore yuan was slightly flat on the day and was last at 7.3308 per dollar, overall maintaining a generally weak bias despite a persistently firmer than expected official guidance fix and signs of tightness in domestic money markets.