Dollar Edges Lower; Remains Near 16-Month High

The dollar edged lower Friday, but still traded just below its 16-month high, as soaring U.S. inflation prompts traders to position for the Federal Reserve raising interest rates more quickly than expected.

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 95.123, just below the overnight fresh 16-month high of 95.267. The index is on track for a gain of around 1% this week, the most since the week ended June 20.

EUR/USD was flat at 1.1451, just above the 16-month low at 1.1436, USD/JPY rose 0.1% to 114.17, while GBP/USD rose 0.1% to 1.3385, just above the 1.3354 low, its weakest level this year.

The catalyst for these dollar gains was Wednesday’s release of U.S. consumer prices data, showing the consumer price index grew 6.2% year-on-year in October, the fastest annual pace since 1990.

These elevated, and persistent, inflation levels are fuelling speculation that the Federal Reserve policymakers will be forced to row back on their belief that price pressures will be “transitory”, and instead lift interest rates sooner than previously indicated.

Markets are now pricing in a first rate increase by July and a high likelihood of another by November.

“Clearly higher inflation is becoming problematic for both the Administration and the Fed. In this light, we suspect Washington will not mind the dollar breaking to the highs of the year as the currency can do some of the tightening of monetary conditions,” said analysts at ING, in a note.

With this in mind, further dollar gains look likely, especially against the euro after European Central Bank President Christine Lagarde said last week that higher interest rates next year were very unlikely, pushing back on market bets for a move as soon as next October.

The “1.1500 support has given way in EUR/USD without much fanfare,” said ING, and “technically, the spot move looks as though it can extend to the 1.1300/1330 area this month.”

The University of Michigan Consumer Sentiment and the JOLTs Job Openings index for September are due later in the session, but traders will especially focus on a speech by New York Fed President John Williams at an online conference later Friday, as this could provide clues to the Fed’s reaction to high inflation.