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The dollar edged higher in early European trade Thursday, with the safe haven currency supported by concerns of an earlier than expected Federal Reserve response to inflationary pressures in the wake of worryingly large jump in U.S. consumer prices.
At 2 AM ET (0700 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 90.775, around its highest level in a week.
EUR/USD traded 0.1% higher at 1.2075, after dropping around 0.6% the previous session, GBP/USD was flat at 1.4052, and USD/JPY was up 0.1% at 109.73, close to its strongest level in five weeks. AUD/USD fell 0.2% to 0.7712, while NZD/USD rose 0.1% to 0.7160, benefiting from further plans to open the New Zealand economy.
The main driver of these dollar gains has been the surge in U.S. inflation, and the concern this will force the Fed to move away from its ultra-easy monetary policies sooner than its current guidance suggests.
Financial markets received the first taste of a post-pandemic surprise surge in US inflation from Wednesday’s Consumer Price Index (CPI), and the impact saw a cascade of selling from equities to government bonds to precious metals. Gold was no exception, helped lower by a spirited climb from the US Dollar. The benchmark DXY index recorded the largest one-day rise in two weeks.
Treasury yields climbed in tandem with the Greenback, putting further overhead pressure on the yellow metal. Rates traders reacted with a more hawkish view on the Federal Reserve’s future policy stance following the strong inflation print. The supposition is that the Fed will be forced to tighten sooner than expected. That hypothesis may prove true, but only time will tell.
The case for an earlier tightening of monetary policy is only growing stronger despite unremitting Fed talk to the contrary. Fed Chair Jerome Powell, along with several other FOMC voters, have taken a strong stance arguing that any outsized rise in prices will be transitory. The central bank could, of course, be right. Still, is the Federal Reserve too entrenched in that view to react promptly?
Asian shares slipped to seven-week lows on Thursday after a shocking rise in U.S. inflation bludgeoned Wall Street and sent bond yields surging on worries the Federal Reserve might have to move early on tightening.
“Higher inflation is a definite negative for equities, given the likely rates response,” said Deutsche Bank (DE:DBKGn) macro strategist Alan Ruskin.
“The more nominal GDP gains are dominated by higher inflation, especially wage inflation, the more the possible squeeze on profit margins. It plays to a more choppy, less bullish equity bias.”
MSCI’s broadest index of Asia-Pacific shares outside Japan lost 0.9%, though trade was thinned by holidays in a number of countries.
Nasdaq futures were trying to rally with a gain of 0.4%, while S&P 500 futures added 0.3%. But EUROSTOXX 50 futures were still catching up with overnight falls and lost 0.7%, while FTSE futures shed 0.5%.
Wall Street was blindsided when data showed U.S. consumer prices jumped by the most in nearly 12 years in April as booming demand amid a reopening economy met supply constraints at home and abroad.
The jump was largely due to outsized increases in airfares, used cars and lodging costs, which were all driven by the pandemic and likely transitory.
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