Karen Brettell
NEW YORK (Reuters) – The dollar gained on Thursday despite a cushioned U.S. producer price inflation report for May, after the Federal Reserve adopted a hawkish tone at the end of its meeting on Wednesday.
Thursday’s data showed U.S. producer prices unexpectedly fell in May, with the headline producer price index (PPI) falling 0.2% last month after rising an unadjusted 0.5% in April. Core prices remained unchanged, having also increased by 0.5% in the previous month.
This came after the US Consumer Price Index (CPI) for May turned out to be weaker than economists expected on Wednesday, causing a edged depreciation of the dollar.
Taken together, the CPI and PPI releases point to the likelihood that the Fed’s preferred measure of inflation, personal consumption expenditures (PCE), will also show easing price pressures.
“Today’s PPI follows a lower-than-expected CPI… which will feed into a likely slightly milder core PCE deflator when we get it later this month,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
However, optimism related to cooling inflation was not enough to keep the dollar down.
The US currency rebounded after Fed officials on Wednesday unexpectedly announced only one interest rate cut this year and postponed the start of rate cuts, possibly even until December.
Fed Chairman Jerome Powell has said policymakers are content to leave interest rates where they are until the economy sends a clear signal that something else is needed – either in the form of a more convincing decline in price pressures or a jump in the unemployment rate.
It was last up 0.23% at 104.93. On Tuesday, it reached a four-week high of 105.46, then fell by as much as 1% after Wednesday’s CPI data.
“The reaction to this CPI was a bit exaggerated. I was almost relieved that he wasn’t worse. And that is what caused such a strong, knee-jerk reaction,” said Fiona Cincotta, market strategy specialist at City Index.
Traders gave up on expectations that the Fed would make cuts in September after Friday’s jobs report for May showed stronger-than-expected job growth and wages also rose more than expected.
However, these bets came to life after Wednesday’s CPI report.
According to CME Group’s FedWatch Tool, Fed Funds futures traders currently see two cuts as likely this year, with a 66% probability of the first cut in September.
The dollar is likely to remain supported as Fed policy contrasts with more dovish international central banks.
“I’m not convinced that the top dollar is there yet on this move,” Chandler said. “We may not have reached maximum policy divergence yet.”
The European Central Bank and the Bank of Canada have started cutting interest rates and may cut them again before the Fed starts easing interest rates.
Uncertainty over the European elections is also likely to hurt the euro against the dollar.
“This political uncertainty in Europe is enough to support the dollar,” Chandler said.
Far-right parties gained popularity in Sunday’s European Parliament elections, prompting French President Emmanuel Macron to call early elections in his country.
The euro was last down 0.19% at $1.0786. It fell to $1.07195 on Tuesday, the lowest level since May 2, before rising to $1.08523 on Wednesday as the dollar weakened.
The yen also fell ahead of the end of a two-day meeting on Friday for the Bank of Japan, where it will consider tapering bond purchases in a key first step toward shrinking its nearly $5 trillion balance sheet.
The yen in particular has suffered from a wide divergence between interest rates in Japan and the US.
The dollar was last up 0.29% at 157.16 yen.
In cryptocurrencies, bitcoin fell 0.70% to $67,603.
