Dollar Weakens After Inflation Data Calms Tapering Fears

The dollar weakened in early European trading Wednesday, pushed down to three-week lows by falling bond yields after the rise in U.S. inflation in March wasn’t deemed sufficient to change Federal Reserve thinking.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 91.683, falling to its lowest level since March 22.

USD/JPY fell 0.2% at 108.83, touching its lowest level in three weeks, EUR/USD climbed 0.2% to 1.1967, hitting its highest level since mid-March, GBP/USD rose 0.3% to 1.3791, while the risk-sensitive AUD/USD rose 0.5% to 0.7676.

The U.S. consumer price index jumped 0.6% in March versus the previous month, the largest gain since August 2012, and rose 2.6% from a year earlier, both 0.1 percentage points above market expectations.

While these figures were above consensus expectations, there were some in the market that expected a sharper rise in inflation given the extent of pent up demand on the back of hefty fiscal stimulus and a successful vaccination program.

The yield on the benchmark 10-year U.S. Treasury note dipped to 1.620%, a far cry from the 1.78% level seen at the end of March.

Federal Reserve officials have repeatedly stated that the central bank will treat any near-term price pressures as transitory, and this CPI release is not seen pressuring them to start tapering the ultra-easy monetary policies that have helped the U.S. economy start to recover from the pandemic.

“We also do not expect the pickup in production and international trade costs – evident in the upside surprises in PPI inflation last week – to have a meaningful impact on the CPI, with such costs representing a relatively small input to consumer prices,” said analysts at ABN Amro, in a note.

“As such, the outlook for inflation remains a broadly benign one, and we expect the Fed to therefore fully look through this bounce in inflation.”

Elsewhere, NZD/USD rose 0.7% to 0.7101, benefiting from the weaker greenback tone even as New Zealand’s central bank held its official interest rate and asset purchase programme steady, widely as expected.

USD/RUB fell 0.4% to 75.63 after U.S. President Joe Biden proposed a summit with Russian President Vladimir Putin to tackle a raft of disputes, attempting to reduce tensions following a Russian military build-up on Ukraine’s border.