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Dollar weakens, euro edges higher after inflation data




SINGAPORE, May 10 (Reuters) – The dollar fell against other major currencies on Wednesday on news that U.S. inflation eased more than expected, raising the likelihood that the Federal Reserve may halt its rate hikes.

Data from the US Labor Department showed April inflation cooled to 4.9%, the smallest year-over-year increase in two years. However, so-called core inflation remained sticky at 5.5%, suggesting that interest rates may need to stay high for some time to tame it.

“The US dollar softened modestly on news that US core CPI inflation is slightly lower in April. However, the data offers little resolution for Fed hawks and doves,” said Jane Foley, head of currency strategy at Rabobank London.

“At 5.5%, core CPI inflation is well above the 2% target and doing little to change the House’s view that the Fed will not be able to cut rates this year.”

Following the data, the euro rose 0.24% to $1.0987, while the pound gained 0.14% to $1.2640.

The Japanese yen was last seen at $134.50 as the dollar fell 0.52%.

Against a basket of currencies, the dollar index fell 0.2% to 101.38 after hitting a low of 101.21.

“There is still anxiety in the market that the Fed is not done raising interest rates,” said Adam Button, chief currency analyst at Forexlive.

“Even though the employment inflation report was only slightly lower than expected, you could see a sigh of relief in the market. And that meant selling the dollar quite aggressively. So … I think the market has been holding its breath ahead of this report.”

Economists polled by Reuters expected core US consumer prices to rise 5.5% year-on-year for April.

A stronger-than-expected reading would have proved a headache for the Fed, which last week signaled it was open to ending its aggressive tightening cycle after delivering 10 consecutive rate hikes since March 2022.

Fed funds futures traders are pricing in a pause ahead of expected September rate cuts. The Fed’s target range is 5% to 5.25%. ,

Reuters graphics

Button believes it is far too early to start talking about interest rate cuts.

“I think the market is ready to move past the inflation narrative. But what the Fed needs to see is rising unemployment before it even thinks about cutting interest rates,” he said.

“I think even if inflation goes down to 2%, the Fed won’t cut interest rates until it looks like a recession is imminent or certain. So the growth part of the equation will be much more important from here for the market and for the Fed.”

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Bid prices in currency at 10.33 (1433 GMT)

Reporting by Rae Wee; Editing by Edwina Gibbs

Our standards: Thomson Reuters Trust Principles.



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