The U.S. dollar soared to a one-week high against a basket of currencies on Friday, extending its momentum from the prior session following robust U.S. consumer price data that underscored the growing anticipation that the Federal Reserve may be compelled to maintain elevated interest rates for an extended period.
In September, the consumer price index (CPI) surged by 0.4%, maintaining an annual rate of 3.7%, mirroring August’s figures, as opposed to the 0.3% monthly gain and 3.6% year-on-year increase anticipated by economists polled by Reuters.
Earlier in the week, data revealed that U.S. producer prices had exceeded expectations in September, driven by increased costs for energy commodities and food products.
Helen Given, FX Trader at Monex USA, explained, “Traders were initially skeptical of the hot PPI for September, but the CPI data released yesterday provided substantial validation. I view the significant move in the USD yesterday as a correction for the market’s initial underreaction to Wednesday’s PPI data.”
The dollar index, which measures the U.S. currency against six major counterparts, inched up by 0.11% to 106.63. Following Thursday’s remarkable 0.8% surge, marking its most substantial one-day gain since March 15, the index is on track to conclude the week with a 0.5% increase.
In addition to the CPI surge, the dollar benefited from safe-haven purchases driven by escalating tensions in the Middle East, as Israel issued a plea for civilians to evacuate the northern Gaza Strip.
Jonas Goltermann, Deputy Chief Markets Economist at Capital Economics, noted, “Our sense is that the greenback’s resurgence largely reflects increasing economic and geopolitical uncertainties stemming from the recent conflict between Hamas and Israel.”
Expectations for continued support of the dollar were further bolstered by commentary from Federal Reserve speakers. Federal Reserve Bank of Philadelphia President Patrick Harker, on Friday, stated his belief that the central bank is likely finished with rate hikes, considering the diminishing price pressures. However, he acknowledged the uncertainty regarding how long interest rates would need to remain elevated.
Friday’s data revealed that U.S. consumer sentiment had declined in October, with households anticipating higher inflation over the next year. Nonetheless, the robust labor market was anticipated to continue buttressing consumer spending.
Thursday’s boost to the dollar pressured the Japanese yen, which approached the sensitive 150 level briefly touched last week before a strong reversal, prompting speculation of market intervention.
The Japanese yen concluded the day, up 0.21%, at 149.5 per dollar, as market participants remained vigilant for signs of weakness.
Adam Cole, Chief Currency Strategist at RBC, explained, “The risk of intervention is clearly high, constraining the dollar-yen, which might otherwise be trading higher.”
Meanwhile, Sweden’s crown appreciated against both the dollar and euro after consumer price data surpassed forecasts, heightening the possibility of a rate hike by the Riksbank.
Investors also reacted to producer and consumer prices data from China on Friday, which revealed that deflationary pressures were marginally stronger than expected.
The offshore Chinese yuan maintained its position at 7.3114 per dollar.
In tandem, the Australian dollar, which often acts as a proxy for Chinese growth, marked a 0.23% decline, concluding the session at $0.6299.
Finally, the Canadian dollar experienced a slight gain against its U.S. counterpart on Friday, propelled by the surging oil prices, a vital Canadian export, and investors ramping up expectations for another Bank of Canada interest rate hike later this month.
