Written by Karen Brettell
NEW YORK (Reuters) – The dollar rose on Thursday despite the US producer price inflation report for May, after the Federal Reserve adopted a hawkish tone at the end of its meeting on Wednesday.
Data on Thursday showed that US producer prices fell unexpectedly in May, with the headline producer price index falling 0.2% last month after rising an unrevised 0.5% in April. Core prices were flat, having also seen a 0.5% increase in the previous month.
This comes after the US CPI for May on Wednesday was weaker than economists expected, leading to a sharp sell-off in the US currency.
Taken together, the CPI and PPI releases make it likely that personal consumption expenditures (PCE), the Fed's preferred measure of inflation, will also show a decline in price pressures.
“Today's PPI comes on the heels of a weaker-than-expected CPI…which will feed into what will likely be a fairly basic PCE contraction when we get it at the end of the month,” Mark Chandler said. Chief market strategist at Bannockburn Global Forex in New York.
But optimism about cooling inflation was not enough to keep the dollar down.
The US currency rebounded after Federal Reserve officials on Wednesday unexpectedly predicted only one rate cut this year and pushed back the start of rate cuts to late December.
Federal Reserve Chair Jerome Powell said policymakers are content to leave interest rates where they are until the economy sends a clear signal that something else is needed — either through a more convincing decline in price pressures or a jump in the unemployment rate.
It rose in recent transactions by 0.23% to 104.93. It reached a four-week high of 105.46 on Tuesday, before falling as much as 1% following Wednesday's CPI data.
“It was a bit of an overreaction to the CPI,” said Fiona Cincotta, market strategist at City Index. “It was almost a relief that it wasn’t worse. That sparked a strong knee-jerk reaction.”
Traders had trimmed their bets that the Fed would cut interest rates in September after Friday's employment report for May showed more-than-expected job growth, while wages also rose more than expected.
But those bets were revived after Wednesday's CPI report.
Fed funds futures traders now see the possibility of two cuts this year, with the first cut in September seen as a 66% probability, according to CME Group's FedWatch tool.
The dollar is likely to remain supported as Fed policy contrasts with more dovish international central banks.
“I'm not convinced the dollar has reached the top of this step,” Chandler said. “We may not have reached maximum policy divergence yet.”
The European Central Bank and the Bank of Canada have begun cutting interest rates, and may cut them again before the Fed begins easing.
Uncertainty over the European elections is also likely to hurt the euro against the dollar.
“This political uncertainty in Europe is enough to maintain the dollar supply,” Chandler said.
Far-right parties made gains in the European Parliament elections on Sunday, prompting French President Emmanuel Macron to call for early elections in his country.
The euro fell in recent trading by 0.19 percent to $1.0786. It fell to $1.07195 on Tuesday, the lowest level since May 2, before jumping to $1.08523 on Wednesday as the dollar weakened.
The yen also fell before the Bank of Japan concludes its two-day meeting on Friday when it considers reducing its bond purchases, taking the first major step to reduce its $5 trillion balance sheet.
The yen in particular has suffered from the wide divergence between Japanese and US interest rates.
The dollar rose in recent trading by 0.29 percent to 157.16 yen.
In cryptocurrencies, Bitcoin fell 0.70% to $67,603.