LONDON/SINGAPORE—The dollar rose on Wednesday in the wake of stubbornly high U.S. inflation data and firm words on interest rates from Federal Reserve officials.
U.S. consumer price index (CPI) inflation accelerated month-on-month in January, rising 0.5 percent as expected, due in part to higher rental and food costs.
Year-on-year, prices rose 6.4 percent. That was down from 6.5 percent in December but above economists’ expectations of 6.2 percent.
The dollar climbed against most major currencies on Wednesday, with the euro down 0.14 percent to $1.072. The euro touched a 10-month high of $1.103 on Feb. 2 but has since slipped.
“It is a reaction to the CPI data, and also the tone of Fed officials recently,” said Jane Foley, head of FX strategy at Rabobank.
“The market is now expecting a higher peak for the Fed funds rate than they were expecting even a week or two ago.”
Japan’s yen was off by 0.2 percent at 133.34 per dollar. It touched a six-week low earlier in the session at 133.44.
In December, Fed board members’ median projection foresaw interest rates peaking at 5.1 percent this year.
But interest rate futures markets now price a peak above 5.2 percent and traders are becoming less sure that cuts are coming in 2023. Rates currently stand at 4.5 percent to 4.75 percent.
Fed officials struck a tough tone on Tuesday.
“With the strength in the labour market, clearly there are risks that inflation stays higher for longer than expected, or that we might need to raise rates higher,” New York Fed President John Williams said in New York.
Deutsche Bank’s economists said they now expect the Fed to raise rates as high as 5.6 percent, having previously expected a 5.1 percent peak.
“Inflation is likely to remain too high over at least the next few months,” the bank’s chief U.S. economist Matthew Luzzetti said in a note to clients.
The U.S. dollar index, which gauges the currency against its peers, was up 0.25 percent to 103.51 after closing roughly flat on Tuesday.
Sterling dropped 0.79 percent to $1.208 after British inflation cooled more than expected in January to 10.1 percent, alleviating some of the pressure on the Bank of England to keep hiking rates.
Also on investors’ radars was an announcement by Scottish First Minister Nicola Sturgeon that she would step down after eight years in the job.
The Australian dollar fell 1.2 percent to $0.69. Meanwhile, China’s yuan traded onshore hit a more than one-month low at 6.8498 to the dollar and was last at 6.839.
Australia’s central bank chief Philip Lowe told members of parliament that rates still had a way to rise.
U.S. retail sales figures are due later in the day.
