Karen Brettell
NEW YORK (Reuters) – The dollar rose on Thursday despite a weak U.S. producer price inflation report for May, after the Federal Reserve adopted a hawkish tone at the end of its meeting on Wednesday.
Data on Thursday showed U.S. producer prices fell unexpectedly in May, with the headline producer price index (PPI) falling 0.2% last month after rising an unrevised 0.5% in April. Core prices remained unchanged after rising 0.5% in the previous month.
This comes after May’s US consumer price index (CPI) was softer than economists had expected on Wednesday, triggering a sharp sell-off in the US dollar.
Taken together, the CPI and PPI data make it likely that personal consumption expenditures (PCE), the Fed’s preferred measure of inflation, will also show an easing in price pressures.
“Today’s Producer Price Index follows a softer-than-expected Consumer Price Index… which will likely be a slightly softer core PCE deflator when we get it at the end of the month,” Mark Chandler said. Chief Market Strategist at Bannockburn Global Forex in New York.
But optimism about falling inflation was not enough to hold back the dollar.
The U.S. currency rebounded after Federal Reserve officials on Wednesday unexpectedly forecast only one interest rate cut this year and delayed the start of rate cuts, possibly as early as December.
Fed Chairman Jerome Powell said policymakers are willing to keep rates on hold until the economy sends a clear signal that something more is needed, either through a more compelling reduction in price pressures or a jump in the unemployment rate.
Other data on Thursday showed that the number of Americans filing new claims for unemployment benefits rose last week to a 10-month high.
The price was last up 0.49% at 105.20. It hit a four-week high of 105.46 on Tuesday before falling as much as 1% after Wednesday’s consumer price index data.
“The reaction (to) the consumer price index was a little exaggerated. It was almost a relief that he didn’t get worse. And that’s what caused such a strong knee-jerk reaction,” City Index market strategist Fiona Cincotta said.
Traders cut bets that the Fed will cut rates in September after Friday’s May jobs report showed more jobs growth than expected, while wages also rose more than expected.
However, these rates were resumed after the release of the consumer price index report on Wednesday.
Fed fund futures traders now see the likelihood of two cuts this year, with the first cut in September pegged at a 68% probability, according to CME’s FedWatch Tool.
The dollar is likely to remain supported as the Fed’s policy contrasts with the more accommodative policies of international central banks.
“I’m not sure the dollar will top out with this move,” Chandler said. “We may not have reached maximum political divergence yet.”
The European Central Bank and Bank of Canada have begun cutting rates and may cut them again before the Fed begins easing policy.
Uncertainty over the European elections is also likely to hurt the euro against the US dollar.
“This political uncertainty in Europe is enough to keep the dollar strong,” Chandler said.
Far-right parties gained an advantage in European Parliament elections on Sunday, prompting French President Emmanuel Macron to call early elections in his country.
The euro was last down 0.65% at $1.0739. It fell to $1.07195 on Tuesday, its lowest level since May 2, before jumping to $1.08523 on Wednesday as the dollar weakened.
The yen also fell ahead of the end of the Bank of Japan’s two-day meeting on Friday, at which it will consider cutting bond purchases, taking a key first step toward trimming its nearly $5 trillion balance sheet.
The yen in particular suffered from the wide discrepancy between Japanese and US interest rates.
The dollar was last up 0.11% at 156.89 yen.
In cryptocurrencies, Bitcoin fell 1.86% to $66,801.