Dollar advances as US inflation data weighs on rates outlook

© Reuters. FILE PHOTO: U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Ankur Banerjee

SINGAPORE (Reuters) – The dollar was firm on Friday and set to snap a three-week losing streak as hotter-than-expected U.S. inflation data stoked worries about when and by how much the Federal Reserve would start cutting interest rates this year.

Data on Thursday showed the U.S. producer price index for final demand rose 0.6% in February above the 0.3% rise economists had forecast. That came after figures on Tuesday showed consumer prices increased strongly for a second straight month in February.

The U.S. central bank is due to meet next week and while the market is not expecting any change in interest rates, investors will be closely watching for its economic projections and comments from Fed Chair Jerome Powell.

The string of sticky inflation reports has led traders to dial back their expectations, with markets now pricing in 60% chance of the Fed cutting rates in June, compared to 74% a week earlier, according to the CME FedWatch tool.

The data highlights “the risk that the last mile on taming inflation in the U.S. might not be as easy as progress made to date,” said Ryan Brandham, head of global capital markets, North America, at Validus Risk Management.

“It could give the Fed even more reason to push back the timing of any interest rate cuts in 2024.”

Traders are now pricing in 76 basis points of cuts this year, closer to the Fed’s own projection in December.

The dollar index, which measures the U.S. currency against six rivals, was 0.058% higher at 103.44, after rising 0.55% on Thursday. The index is on track for a 0.7% rise for the week, its first week of gain in four.

The euro was down 0.04% to $1.0877, while sterling was 0.10% lower at $1.2738.

The yield on 10-year Treasury notes eased 1.4 basis points to 4.284% in Asian hours, having gained as much as 10.6 basis points on Thursday. [US/]

The Japanese yen was a touch weaker at 148.49 per dollar and is on course for a nearly 1% weekly decline, its steepest weekly decline since January as the will-they-won’t-they uncertainty around the Bank of Japan’s policy movement keeps traders on edge.

Jiji news agency reported on Thursday the BOJ has started to make arrangements to end its negative interest rate policy at the March 18-19 meeting.

Preliminary results of Japan’s spring wage negotiations are due on Friday, with several of the country’s biggest companies having already agreed to meet union demands for pay increases.

“A strong shunto wage outcome is widely seen as the last piece of the puzzle that will prompt the BOJ to unwind its ultra‑easy monetary policy settings,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY).

“We consider a result that is higher than last year’s 3.58% will be supportive for a near term BOJ policy exit and JPY gains.”

In other currencies, the Australian dollar fell 0.18% to $0.657, while the New Zealand dollar fell 0.39% to $0.611.

In cryptocurrencies, bitcoin last rose 1.82% to $71,959, having touched a record high of $73,803 on Thursday. Ether last rose 1.41% to $3,895.40.