Dollar Edges Higher; Euro Weakens With Ukraine War Set to Drag On

The U.S. dollar edged higher in early European trade Wednesday after the release of red-hot inflation data, while the euro traded near a five-week low on fears that the war in Ukraine may continue for some time to come.

At 2:55 AM ET (0655 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 100.485.

The release of the U.S. consumer price index lived up to expectations, as prices rose 8.5% in March compared with a year ago, the highest rate since 1981, boosted by the soaring cost of gasoline.

However, the core CPI, which excludes volatile energy and food prices, fell short of estimates, landing at 6.5%. This raised the possibility that the Federal Reserve might not need to be as aggressive in the second half of this year as some had originally expected.

The benchmark 10-year U.S. Treasury yield traded at 2.765% early Wednesday, compared with an over-three-year peak of 2.836% before the inflation data.

Elsewhere, EUR/USD traded 0.1% lower at 1.0818, just above a new five-week low following Russian President Vladimir Putin vowing to continue the invasion, stating that peace talks with Ukraine were “at a dead end”.

The war in Ukraine has weighed heavily on sentiment in Europe, with the German ZEW economic research institute stating Tuesday that its economic sentiment index fell to -41.0 points from -39.3 in March.

The European Central Bank meets on Thursday, and has the difficulty of balancing soaring consumer prices with these pressures on growth. Although little in the way of rate hikes are expected at this meeting, money markets are pricing in about 70 basis points of interest rate tightening by December.

GBP/USD fell 0.1% to 1.2986 after data showed U.K. inflation climbing to its highest in over 30 years in March, with the annual rate of consumer inflation climbing to 7.0%, up 1.1% in month-on-month terms.

The Bank of England has lifted interest rates at its last three meetings, to above the levels seen pre-pandemic, but so far this has done little to impact the growing cost-of-living crisis in the country.

USD/JPY rose 0.6% to 126.14, with the yen unloved as the Bank of Japan has repeatedly intervened to keep benchmark bond yields around zero, in direct contrast to most of the yields of rival countries’ debt.

NZD/USD fell 0.7% to 0.6800 after the Reserve Bank of New Zealand lifted its official cash rate by 50 basis points to 1.5%, adding that “the committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations. It is appropriate to continue to tighten monetary conditions at pace.”

USD/CAD traded flat at 1.2643 ahead of Wednesday’s policy-setting meeting of the Bank of Canada. The central bank is widely expected to hike interest rates by a half-percentage point, becoming the first in the Group of Seven to lift rates that aggressively to combat inflation running at a three-decade high.