©Reuters. FILE PHOTO: Japanese yen and U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
By Gertrude Chávez-Dreyfuss
NEW YORK (Reuters) – The dollar rose to three-month highs on Tuesday after data showed U.S. inflation rose more than expected in January, bolstering expectations that the Federal Reserve will keep interest rates stable at March.
Following the data, the greenback also surpassed 150 yen for the first time since November.
Data on Tuesday showed the consumer price index (CPI) rose 0.3% month-on-month in January, above the 0.2% rise expected by economists polled by Reuters. On an annual basis it gained 3.1% against the estimated growth of 2.9%.
Excluding volatile food and energy components, the CPI rose 0.4% last month after rising 0.3% in December. The core consumer price index rose 3.9% year-on-year in January, in line with December’s increase.
The greenback rose to 150.88 yen, a three-month high. The latest gain was 0.9% at 150.75 yen, on track for its best daily gain in a week and a half. That 150 level will likely trigger further criticism from Japanese officials as they try to support the currency, analysts said.
The yen, which has fallen more than 6% against the dollar this year, is under constant pressure as investors reduce their expectations about the size and pace of the Federal Reserve’s easing cycle.
The reading turned positive following the inflation data, hitting a three-month high of 104.95. It was last up 0.7% at 104.89, on pace for its best daily gain since Feb. 2.
“The key message from today’s consumer price index is that it is slowing, but less than expected,” said Dec Mullarkey, managing director of SLC Management in Boston. “The data supports the Fed’s decision to continue waiting for more assurance that inflation is well contained.”
Federal funds futures Tuesday were pricing in no rate cuts in March and a less than 50% chance of easing in May, according to the LSEG rate odds app. The Fed’s first rate cut is now expected to occur at its June meeting, with a probability of around 80%.
The market has also factored in about three rate cuts this year, in line with the Fed’s rate forecast, or what’s called the “dot plot” released in December.
“Such an alignment should help reduce the risk of nasty surprises and spikes in volatility later in the year,” SLC’s Mullarkey said.
In other currencies, the euro fell 0.6% to $1.0707, after falling to $1.0700, its lowest since mid-November. In cryptocurrencies, bitcoin hit its highest since December 2021 at $50,383, but fell below $50,000 after the CPI data. It was last down 0.9% at $49,389. The world’s largest cryptocurrency has risen nearly 18% this year, helped by regulatory approval last month for U.S.-listed exchange-traded funds designed to track its price.
Next on the economic calendar will be the US retail sales report on Thursday. Economists expect a 0.1% decline for January, compared with a 0.6% rise in December, according to a Reuters poll.
Recent retail sales data has consistently beaten forecasts for six consecutive months, highlighting the resilience of U.S. consumers, wrote Fawad Razaqzada, market analyst at City Index and FOREX.com in London.
He added that if U.S. retail sales continue to suggest economic resilience, “expect continued gains for the U.S. dollar.”