US Dollar Weakens as Inflation Data Eases Pressure on Fed

The US dollar fell to its lowest level in five months on Friday, as the latest inflation data showed a slower-than-expected rise in consumer prices in November. The report eased some of the pressure on the Federal Reserve to tighten its monetary policy sooner than expected.

According to the Labor Department, the consumer price index (CPI) increased by 0.8% in November, compared to 0.9% in October. The annual inflation rate slowed down to 6.8% from 6.2%, marking the first deceleration since June. However, the inflation rate was still the highest since 1982.

The core CPI, which excludes food and energy prices, rose by 0.5% in November, down from 0.6% in October. The annual core inflation rate eased to 4.9% from 4.6%, the lowest since July.

US Dollar Weakens as Inflation Data Eases Pressure on Fed
US Dollar Weakens as Inflation Data Eases Pressure on Fed

The inflation data was lower than the market expectations of 0.9% for the headline CPI and 0.6% for the core CPI. The report suggested that some of the inflationary pressures caused by supply chain disruptions and labor shortages were starting to ease.

Dollar Drops to Five-Month Low

The US dollar index, which measures the greenback against a basket of six major currencies, fell by 0.4% to 95.63, the lowest level since June 29. The dollar weakened against most of its peers, especially the euro, the British pound, and the Australian dollar.

The dollar’s decline was driven by the reduced expectations of a faster and more aggressive monetary tightening by the Fed. The Fed is widely expected to announce a faster tapering of its bond-buying program at its policy meeting next week, but the inflation data may give it more room to be patient and flexible in raising interest rates.

The market is currently pricing in three rate hikes by the Fed in 2023, starting from June. However, some analysts believe that the Fed may wait until the second half of the year to begin raising rates, depending on the evolution of inflation and the economic recovery.

Market Reaction and Outlook

The inflation data had a mixed impact on the US stock market, as investors weighed the positive implications of a more dovish Fed against the negative effects of a weaker dollar and higher import costs. The Dow Jones Industrial Average rose by 0.2%, while the S&P 500 and the Nasdaq Composite fell by 0.1% and 0.4%, respectively.

The US Treasury yields also fell, as the inflation data reduced the demand for inflation-protected securities. The yield on the 10-year Treasury note dropped by 5 basis points to 1.44%, the lowest level since October 8.

The outlook for the US dollar remains uncertain, as the market awaits more clues from the Fed and other economic indicators. The dollar may face more downside pressure if the Fed signals a cautious and gradual approach to tightening, or if the US economic growth slows down due to the spread of the new Omicron variant of the coronavirus. On the other hand, the dollar may rebound if the Fed surprises the market with a more hawkish stance, or if the US inflation remains elevated and persistent.

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