The dollar index fell on Friday and major currency pairs were stuck in recent ranges as markets ignored the rising US inflation figure on Thursday, believing the Federal Reserve’s position that it is likely that be a temporary spike.
US consumer prices rose 5% year-on-year in May, the biggest jump in nearly 13 years. see More information Currency markets were weak all week in anticipation of the data, but when they came in above expectations, there was little market reaction.
The Federal Reserve has repeatedly said that it expects any rise in inflation to be temporary and that it is too early to discuss reducing its monetary stimulus.
The Dollar Index was down in the Asian session and at 0723 GMT it was down 0.1% for the day at 89.995. It was on its way to a small weekly loss of about 0.2%.
Benchmark 10-year US Treasuries actually rose 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 high inflationary pressures will be short-lived,” UBS strategists said in a note to clients.
“Policy makers at the Federal Reserve and the European Central Bank have been unusually consistent in emphasizing that policy will only need to be tightened if inflation becomes more sustained – which they currently consider unlikely.”
There were signs of a slight increase in risk appetite in currency markets, with the Australian dollar rising 0.2% to $0.7768 and the New Zealand dollar rising 0.1% to $0.7204.
But the British pound held steady at $1.41695.
A dovish stance by the ECB at its Thursday meeting had little effect on the EUR, which was stable for the day at $1.2181 and set for a small weekly gain of around 0.1%.
The ECB said it would continue buying emergency bonds at a “significantly higher” pace, even as its growth and inflation forecasts raised. see More information
An indicator of implied euro-dollar volatility over a six-month horizon was at its lowest level since early March 2020, almost back to levels before the COVID-19 pandemic caused a spike in volatility.
“This excess liquidity is reducing volatility levels across all asset classes and boosting the search for carry, including at the end of yield curves,” ING strategists wrote in a note. In currency trading, “carry” refers to gains from holding higher yielding currencies.
“This environment should continue to see the dollar softly offered against currencies with good histories (currency tightening or commodity exposure) and some carry,” ING said.
In Russia, the central bank is expected to raise its interest rate by 5% by as much as 50 basis points – its third consecutive rise. see More information
The central bank is targeting an annual consumer inflation of 4%. It rose above the target in late 2020 amid global inflation and as the weaker ruble seeped into prices.
Elsewhere, Bitcoin rebounded slightly, while Ether was set for a 10% weekly decline. Both have stabilized this month but are still trading significantly below their mid-May peaks.
Attention now turns to the Fed meeting next week. The central bank is expected to announce in August or September a strategy to scale back its massive bond-buying program, but it will not start cutting monthly purchases until early next year, a Reuters poll of economists revealed. see More information
Meanwhile, the leaders of the Group of Seven’s richest economies are meeting at the English resort of Carbis Bay on Friday. see More information
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