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US dollar strengthens as high inflation reduces expectations for Federal Reserve interest rate cuts.

The Dollar Rises as U.S. Inflation Data Shifts Fed Rate Cut Expectations

Dollar Strengthens Amid Surprising U.S. Inflation Figures

The dollar reached a three-month high against major peers after U.S. inflation figures led traders to adjust their expectations for a Federal Reserve interest rate cut. The consumer price index (CPI) for January showed a 3.1% year-on-year increase, surpassing the anticipated 2.9% rise. As a result, money markets have now priced in no Fed cut in March and a 53% chance of a cut in June, according to ME Group.

Impact on Currency Markets and Fed’s Easing Cycle

The US Dollar Index, which measures the U.S. currency against six major peers, traded 0.05% higher at 104.91, reaching a fresh three-month high of 104.97. The unexpected CPI data has led to a shift in the debate around the Fed’s easing cycle, with discussions now focusing on a potential start of the easing cycle in May or June. This has also raised the possibility of rate cuts by the Swiss National Bank and the European Central Bank ahead of the Fed.

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UK Inflation and Bank of England’s Response

Against the British pound, the dollar rose 0.35% to $1.2548, briefly touching an eight-day high after UK inflation data showed no acceleration in January, relieving pressure on the Bank of England (BoE) to maintain rates at current levels. UK inflation remained unchanged at an annual rate of 4.0% in January, contrary to expectations of a 4.2% increase. Economists now anticipate a sharp fall in the annual inflation rate in the coming months, potentially allowing the BoE to consider rate cuts in June.

Yen Watch and Japan’s Intervention

Meanwhile, the dollar weakened against the yen after Japanese currency officials warned against rapid and speculative movements. Japan’s Finance Minister, Shunichi Suzuki, expressed concern about the undesirable impact of rapid currency moves on the economy. This comes after Japan’s top currency diplomat, Masato Kanda, stated that appropriate actions on forex could be taken if necessary. The dollar fell 0.1% against the yen to 150.60, remaining close to a three-month high reached earlier this week.

Euro Zone Economic Data and Cryptocurrency Market

The euro remained relatively stable after a series of euro zone economic data releases, with employment rising by 0.3% quarter-on-quarter and 1.3% year-on-year in the fourth quarter. Economic growth in the region remained flat in the last three months of 2023. Additionally, leading cryptocurrency bitcoin surged 3.1% to 51,230, trading near its highest level since late December 2021, representing a 34% increase from its low on Jan. 23.

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