The dollar exhibited strength against major currencies on Tuesday, following inflation data from the US that surpassed expectations, thereby reinforcing anticipations of an interest rate hike by the Federal Reserve in the upcoming month. Data indicated that the Consumer Price Index rose by 0.4% last month, surpassing the consensus forecast of a 0.3% increase as projected in a Reuters poll of economists. The dollar extended its gains against a basket of currencies following the report, while the yield on the 2-year note, which typically aligns with Fed rate expectations, increased significantly, last recorded at 4.738%, up 19.07 basis points.
The euro experienced a decline of 0.48% relative to the dollar, trading at $1.117. The dollar appreciated by 0.47%, reaching a value of 158.66 against the Japanese yen. Against the Swiss franc, the dollar appreciated by 0.89%, reaching a value of 0.8251 franc. The market was taken by surprise as the data seemed to align with the hawkish remarks made by Federal Reserve Governor Christopher Waller, who indicated on Tuesday that the central bank ought to increase short-term borrowing costs next month, according to Steve Englander.
“The fact that Waller was sounding so hawkish caught the market’s eye. That was the beginning of the dollar’s rally and the rates’ rally,” Englander said. “With the CPI also coming on the hot side, especially because it seemed to be fairly broad based, the market is getting worried. The dollar has been mostly an oil trade since the (November 3 US midterm) election but now people are thinking, ‘We’re looking at the wrong ball. The ball we should have been focused on is the inflation risk and the Fed ball,'” Englander said.
Markets currently reflect an 89% probability of a rate increase in December by the Federal Reserve, as indicated by CME’s FedWatch tool. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.51% to 102.20. The trade- and sentiment-sensitive Australian dollar declined by 1% to $0.6855. The New Zealand dollar depreciated by 0.59% against the US dollar, settling at $0.5597.
