LONDON – The dollar index was down on Friday and major currency pairs stalled within recent ranges as markets ignored Thursday’s high US inflation number, believing the Federal Reserve’s stance that it is likely to be a temporary problem.
US consumer prices rose 5% year-on-year in May, the biggest jump in nearly 13 years. Currency markets had been dormant all week in anticipation of the data, but when it beat expectations, there was little reaction from the market.
The Federal Reserve has repeatedly said that it expects any increase in inflation to be temporary and that it is too early to discuss reducing its monetary stimulus.
The dollar index was lower in the Asian session and at 0723 GMT, it was down 0.1% on the day at 89.995. It was on track for a small weekly loss of around 0.2%.
Benchmark 10-year US Treasuries actually rallied to a three-month high in the wake of the CPI, as short sellers stopped betting on rising yields.
“We agree with the Fed that the elevated inflationary pressures will be short-lived,” UBS strategists said in a note to clients.
“Both the Federal Reserve and the European Central Bank policy makers have been unusually consistent in emphasizing that policy will only need to be adjusted if inflation becomes more sustained, which they currently consider unlikely.”
There were signs of slightly higher risk appetite in the currency markets, as the Australian dollar rose 0.2% to $ 0.7768 and the New Zealand dollar rose 0.1% to $ 0.7204.
But the British pound was stable at $ 1.41695.
GLUTE OF LIQUIDITY
A dovish stance from the ECB at its meeting on Thursday had little effect on the euro, which was flat on the day at $ 1.2181 and was set at a small weekly gain of around 0.1%.
The ECB said it would continue to buy emergency bonds at a “significantly higher” rate, even as it raised its growth and inflation projections.
An indicator of implied volatility between the euro and the dollar over a six-month horizon was at its lowest level since early March 2020, almost back to the levels it was at before the COVID-pandemic. 19 will cause an increase in volatility.
“This liquidity glow is driving volatility levels down across all asset classes and fueling the pursuit of carry, even at the long end of yield curves,” ING strategists wrote in a note. In forex trading, “carry” refers to the gains derived from holding higher-yielding currencies.
“This environment should continue to see the dollar offering softly against currencies with good stories (monetary tightening or commodity exposure) and a bit of carry,” ING said.
In Russia, the central bank is expected to raise its 5% interest rate by as much as 50 basis points, its third consecutive rate hike.
The central bank is targeting annual consumer inflation of 4%. It rose above the target in late 2020 amid global inflation and when the weaker ruble leaked into prices.
Elsewhere, Bitcoin rallied slightly, while Ether was set for a 10% weekly drop. Both have stabilized so far this month but are still trading significantly below their mid-May highs.
The focus is now on the Fed meeting next week. The central bank is likely to announce a strategy in August or September to reduce its massive bond-buying program, but it won’t start cutting monthly purchases until early next year, according to a Reuters survey of economists.
Meanwhile, the leaders of the richest economies of the Group of Seven will meet on Friday in the English seaside resort of Carbis Bay.
(Reporting by Elizabeth Howcroft; Edited by Emelia Sithole-Matarise)