U.S. Dollar Gains Ground as Inflation Surges

The U.S. dollar embarked on a vigorous ascent on Friday, buoyed by a surprising surge in inflation data, which has ignited expectations of the Federal Reserve keeping interest rates at higher levels for an extended duration.

The dollar index, measuring the greenback against six major currencies, notched a 0.15% gain, pushing it to 106.73. This upward trajectory marked a continuation of the dollar’s bullish momentum from the preceding day, when it experienced a remarkable 0.9% surge, the most significant single-day rise since March 15.

This robust rally was catalyzed by the release of the U.S. Consumer Price Index (CPI) data on Thursday, revealing a 0.4% increase in September, in line with the annual rate of 3.7%.

These figures surpassed market expectations, which had predicted 0.3% and 3.6%, respectively. The CPI report followed the producer price index (PPI) released on Wednesday, which also outperformed expectations with a 0.5% rise in September and an annual rate of 4.8%.

Higher Inflation, Higher Rates; Higher Rates, Stronger Dollar

These inflation statistics paint a picture of price pressures in the U.S. economy refusing to relent as quickly as many had hoped. Consequently, it is increasingly likely that the Federal Reserve will maintain its firm grip on monetary policy to rein in inflation. Higher interest rates have an inherent appeal for investors, rendering the dollar more attractive.

Backing this view, some Federal Reserve officials voiced their stance on Friday. Philadelphia Fed President Patrick Harker expressed his belief that the central bank has likely completed its rate hikes, emphasizing the ongoing moderation in price pressures while acknowledging the uncertainty surrounding the duration of the necessary rate elevation, as reported by Reuters.

Simultaneously, data released on Friday indicated that U.S. import prices had risen less than anticipated in September. A robust dollar played a role in lowering the cost of non-energy products, potentially assisting in mitigating domestic inflation over time.

The dollar’s resurgence weighed heavily on other currencies, particularly the Japanese yen, which retraced towards the 150 level it briefly touched the previous week before staging a sharp rebound. Currently, the yen is trading at 149.62 per dollar, with market participants keeping a watchful eye for any signs of intervention by Japanese authorities aimed at curbing its depreciation.