Dollar Edges Lower; Brainard Testimony, PPI Data Due

The U.S. dollar edged lower in early European trade Thursday, adding to the previous session’s sharp losses after the release of the latest inflation data failed to encourage any further bets on aggressive Federal Reserve policy tightening.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 94.800, hovering near a two-month low.

USD/JPY traded 0.2% lower to 114.43, near a two-week low, EUR/USD climbed 0.2% higher to 1.1463, climbing to its highest level since mid-November, and GBP/USD rose 0.2% to 1.3729, with sterling showing strength after the Bank of England’s recent rate hike, and shrugging off Prime Minister Boris Johnson’s political travails.

The risk-sensitive AUD/USD climbed 0.2% to 0.7300, climbing an almost two-month high.

Wednesday’s U.S. data showed that the headline consumer price index grew 7% year-on-year and the month-on-month figure rose by 0.5%. Stripping out the volatile energy and food sectors, the core consumer price index grew 0.6% month-on-month and 5.5% year-on-year in December.

While the headline figure showed consumer prices rising at their fastest rate in nearly 40 years, it was largely as expected and is not seen changing the thinking of the Fed policy makers significantly. With at least three rate hikes already in the market price, some traders pared bets on further dollar gains.

That said, “it should allow consolidation for a floor below the dollar in the near term – further cementing expectations for three Fed hikes and leaving the door open to speculate for four in 2022,” said analysts at ING, in a note. “We think this is a reason for markets to keep buying the dips in the dollar for the time being.”

There are more U.S. inflation numbers on the economic data slate later Thursday, with December PPI due, but a lot of attention is likely to be on Fed Governor Lael Brainard as she appears at a hearing on Capitol Hill into her nomination as deputy chair.

In prepared remarks before her appearance, Brainard said tackling inflation and getting it back down to 2% while sustaining an inclusive recovery is the U.S. central bank’s most pressing task.

Fed Chairman Jerome Powell had dampened overly aggressive tightening expectations in his renomination testimony on Tuesday, stating that the Fed was still debating the time frame involved in reducing the central bank’s balance sheet.