Dollar Sinks After Data Shows US Inflation Cooling

The dollar fell more than 1% against major currencies on Tuesday after U.S. consumer price data showed the pace of inflation moderating further in October, increasing the odds that the Federal Reserve is done hiking interest rates. U.S. consumer prices were unchanged last month amid lower gasoline prices, the Labor Department’s Bureau of Labor Statistics (BLS) said, following a 0.4% rise in September.

In the 12 months through October, the consumer price index (CPI) climbed 3.2% after rising 3.7% in September, BLS said. The dollar immediately tumbled on the report’s release and Treasury yields plunged. The benchmark 10-year fell below 4.5%, removing a major support to the dollar’s strength this year. “We think that the dollar will continue to weaken a bit throughout the end of the year, maybe even early into January,” said John Doyle, head of trading and dealing at Monex USA in Washington. The dollar index, a measure of the U.S. currency against six peers, slid 1.55% to 103.980, on track to its biggest single-day percentage decline since Nov. 11, 2022.

The U.S. currency also was poised for its largest declines since November 2022 against the euro and British pound. The dollar slipped 1.73% against the euro to $1.089, 1.82% against the British pound to $1.250 and 1.52% against the Swiss franc to 0.888. The dollar also fell more than 1% versus the Norwegian krone and more than 2% against the Australian and New Zealand dollars. The data was welcome news in the market, where many analysts have been predicting the Fed’s interest rate hiking has peaked. “You can say goodbye to the rate-hiking era,” said Brian Jacobsen, Chief Economist at Annex Wealth Management in Elm Grove, Wisconsin.

But Doyle, among others, cautioned the end of rate hikes did not mean rate cuts would be coming as soon as markets were predicting due to a tight American labor market and resilient U.S. economy that has kept consumers spending. “I don’t think that they’re going to be itching to cut rates necessarily,” he said, referring to Fed policymakers. “The Fed’s going to feel pretty comfortable to ride it out longer.” Fed Chair Jerome Powell and other policymakers in recent days have tried to push back against expectations that the U.S. central bank was done with its aggressive rate-hike cycle. Futures show more than a 68% probability that the Fed cuts its overnight lending rate by 25 basis points or more by next May, according to the CME’s FedWatch tool.

YEN STILL ON INTERVENTION WATCH The Japanese yen, meanwhile, also gained against the dollar, but less than its peers. The yen strengthened 0.97% to 150.23 per dollar when earlier coming under pressure after it briefly jumped against the dollar on Monday – having touched a one-year low. The move was attributed to a flurry of trading in options rather than any intervention from Japanese authorities. DTCC data from LSEG’s Eikon platform shows yen options worth a notional $3.5 billion with strike prices between 151.90 and 152 are due to expire between Wednesday and Friday.

Another $2.2 billion notional worth of options with strikes between 151.90 and 152 will expire between Nov. 20 and the end of the month. Japanese authorities in September and October last year intervened in the currency market to boost the yen for the first time since 1998. “Our base case is that we could have intervention if we break the 152 level for dollar/yen,” said Yusuke Miyairi, an FX strategist at Nomura. OPTIONS STRIKE PRICES BETWEEN 151.90 AND 152 YEN Date of expiry Nov 15 Nov 16 Nov 17 Notional value of 2.6 548.7 351.1 options expiring billion million million (USD).