Title: Dollar Slides as U.S. Inflation Eases, Raising Doubts Over Fed Rate Hikes
The U.S. dollar experienced a decline on Wednesday following the release of hotter-than-expected data on U.S. producer prices, which indicated that underlying inflation in September had moderated more than anticipated. This data has provided further evidence for market participants to question whether the Federal Reserve will continue hiking interest rates.
The producer price index (PPI) for final demand increased by 0.5% in September, slightly lower than the unrevised 0.7% rise observed in August. Economists surveyed by Reuters had predicted a PPI gain of 0.3%. Over the past 12 months, the PPI has risen by 2.2% after advancing 2.0% in August.
However, when food, energy, and trade services were excluded, the core PPI only rose by 0.2% last month, matching the same margin of increase observed in August. On an annual basis, the core PPI increased by 2.8% in the 12 months through September, slightly lower than the 2.9% advance seen in August.
Edward Moya, senior market analyst at OANDA in New York, suggested that despite the presence of some higher numbers, there is optimism in the market that the disinflation process is still intact. He added that building material margins had influenced the data. Moya further stated that the market has become increasingly confident in the belief that the Fed might be finished with raising rates, especially after a series of dovish statements from Fed officials this week.
As a result of the market’s perception that the Fed may pause rate hikes, the dollar index, which measures the U.S. currency’s performance against six other major currencies, hit a two-week low of 105.550. Meanwhile, the euro reached its highest level since September 25, trading at $1.0634.
The dollar’s weakness can be attributed to the continued decline in Treasury yields, with bond prices rallying due to the Fed’s recent softer stance on future rate hikes. It is worth noting that bond yields move inversely to their prices. The yield on 10-year Treasuries fell by 5.2 basis points to 4.604%, marking a nearly 30 basis point drop from the 16-year high of 4.887% reached last Friday following a robust jobs report.
Investors are eagerly awaiting the release of minutes later today from the latest Federal Reserve policymaker meeting, as well as a crucial inflation report on Thursday, to gain further insights into the future trajectory of interest rates.
Apart from monitoring monetary policy developments, investors are also keeping a close eye on the conflict between Israel and Palestinian Islamist group Hamas, which has influenced safe-haven market movements earlier this week.
In other currency news, the sterling rose to a three-week high of $1.2337 and was up 0.2% last at $1.2309. The euro also experienced gains, climbing 0.17% to $1.0624.
Additionally, a recent survey conducted by the European Central Bank (ECB) revealed that euro zone households expect inflation to remain slightly above the ECB’s 2% target for the next three years. The findings pose challenges for rate-setters as they endeavor to convince the public that their plans to keep prices under control are on track. Despite the progress made by the ECB in bringing inflation back down to target, Dutch central bank chief Klaas Knot emphasized that there is still a long road ahead and that further rate hikes cannot be ruled out.
As market participants eagerly await more updates on the Fed’s outlook for interest rates, the dollar’s performance will continue to be closely monitored, along with geopolitical developments that may impact safe-haven assets.
Keywords: U.S. inflation, dollar slides, Federal Reserve, interest rates, producer price index, core PPI, Treasury yields, bond prices, Federal Reserve policymaker meeting, inflation report, sterling, euro, European Central Bank, ECB survey.
