By Laura Matthews
NEW YORK (Reuters) – The dollar pared some losses against major peers on Wednesday but remained weaker as cooler-than-expected data eased fears that inflation was accelerating and raised chances that the Federal Reserve will cut interest rates this year could decrease twice.
The Bureau of Labor Statistics showed consumer prices rose 2.9% in the 12 months to December, in line with economists’ expectations. Core inflation, excluding food and energy prices, came in as expected, but lower than the previous month.
A softer core reading, coupled with producer price data, caused the dollar to fall immediately on Tuesday.
The , which measures the dollar against six other units, fell 0.1% to 109.07. A 26-month high of 110.17 was reached on Monday.
“The cooler inflation pressures were a sign for traders to reduce some long positions in the dollar,” said Joseph Trevisani, senior analyst at FX Street in New York.
Trevisani thinks the Fed will be very cautious about resuming interest rate cuts until there is absolute certainty that inflation will fall again. He doesn’t think so.
As President-elect Donald Trump returns to the White House next week, analysts expect some of his policies will boost growth and increase price pressures.
John Velis, head of FX and macro strategy for the Americas at BNY Markets, said markets will look to future inflation reports to see if they confirm the slow progress of disinflation.
But the new incoming administration will likely issue policies that will upend many basic expectations for the first part of the year, he added.
“We expect the Fed to remain firm on January 29 and not resume rate cuts until much later in the year, pending the progress of disinflation,” Velis said.
Meanwhile, the dollar fell 0.93% against the Japanese yen to 156.49 yen.
The yen strengthened on Wednesday after comments from Bank of Japan Governor Kazuo Ueda, who said the central bank would raise interest rates and adjust the level of monetary support if improvements in the economy and price conditions continue.
Meanwhile, a cooling of British inflation provided relief for the pound. Data showed inflation unexpectedly slowed last month and core measures of price growth – tracked by the Bank of England – fell more sharply – welcome news for Chancellor of the Exchequer Rachel Reeves after a market sell-off.
The British pound last rose 0.1% to $1.2229 against the dollar, while the euro fell 0.15% to $1.0299.
“The dollar’s strength won’t end because of this (CPI) figure,” said Peter Vassallo, FX portfolio manager at BNP Paribas (OTC:) Asset Management. “It’s likely to become more nuanced, and we could see the dollar remain strong against European currencies, but not as strong against the yen.”
The Israeli rate rose as much as 0.8% against the dollar to its strongest level in a month and was last up 0.4% at 3.61 per dollar after a ceasefire agreement was reached on Wednesday was achieved in Gaza. International government bonds issued by Israel and Jordan rose on the news.
Eyes were also on China, where the rate was flat that day and last stood at 7.3319 per dollar. The country generally maintained a broadly weak bias despite continued firmer-than-expected official guidance and signs of tightness in domestic money markets.
