has its worst day in more than 10 years – El Financiero

The dollar had its worst day since at least 2005 after the report inflation in the United States on Thursday surprised traders with slower growth in consumer prices, sparking speculation that the Federal Reserve will slow the pace of interest rate hikes.

The Bloomberg Dollar Spot Index fell about 2 percent after a key indicator of inflation will cool in October more than expected. That’s the biggest drop since the index began in 2005. The CPI report offered hope that the fastest price gains in decades are fading and giving US Federal Reserve officials room to slow amid an aggressive adjustment campaign.

A slower pace of rate hikes could dampen the dollar’s rally this year, which has weakened its G10 peers. One-month risk reversals in the dollar, a gauge of options positioning and sentiment, fell to their lowest level since June, a sign that the demand for dollars may be declining.

“The softer core CPI reading is leading markets to reprice the lower terminal rate,” said Bipan Rai, head of FX strategy at Canadian Imperial Bank of Commerce. “That’s causing more pain right now in the dollar.” Rai still expects the terminal fee to be closer to 5 percent.

The market expectation now shows that un increase of 50 basis points in December is much more likely than a movement of 75 basis points, which reduces the rate differential with the European Central Bank and the Bank of England.

The yen gained more than 3 percent, making it the best-performing currency in the G10 on Thursday, though it has slumped about 19 percent this year. In this “perfect storm” for the dollar, the yen and the South African rand they have room to outperform, said Gregory Marks, a foreign exchange trader at HSBC.

“The market has found itself on the wrong side largely with position averages probably being challenged,” he noted.

European currencies rose against the dollar, with the pound rising 3.1 percent to 1.1707 units, its highest level since mid-September. The UK currency posted its biggest one-day gain against the dollar since March 2020. euro it rose 1.8 percent to 1.0187, its highest level in nearly two months as euro futures volumes soared, while the Swiss franc rose 1.9 percent against the dollar.

“The Fed is likely to remind the market that core inflation is still three times higher that target and remains persistent, so some of the dollar sell-off and increased risk appetite could be misplaced,” said Jane Foley, a strategist at Rabobank in London.

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