US Dollar retreats as December CPI reveals mild inflation rise
- Lingering economic uncertainties drive traders to revisit growth forecasts, spurring cautious positioning across major currency pairs.
- Softer-than-forecast inflation prints spark questions over the Federal Reserve’s next move, compelling markets to reassess rate expectations.
- Benchmark Treasury yields tumble from recent peaks, highlighting market jitters following the latest inflation figures.
The US Dollar (DXY) turns this week into a firm loss, eking out more weakness on Wednesday. The US December CPI release arrived a bit softer than predicted, fueling speculation about the Fed’s path ahead. The US Dollar Index, which measures the value of the USD against a basket of currencies, snaps below 109.00 and could accelerate its downside from here.
Daily digest market movers: US Dollar remains soft after CPI data
- Headline CPI for December climbed by 2.9% YoY, undershooting some market whispers of a stronger result.
- Core CPI rose by 3.2% over the same period, stepping down from November’s pace as monthly core inflation printed at 0.2%.
- The CME FedWatch Tool implies that investors have priced in a hold this month, consistent with a data-dependent stance.
- Yields crumble: The 10-year note slips to around 4.65% from Monday’s 14-month high, reflecting diminished inflation expectations and lighter risk premium.
- Regional surveys point to mixed economic activity with some districts reporting subdued expansion while others see a mild pullback.
- Tariff talk remains a wildcard as some districts worry new policy changes might introduce an upside inflation risk, complicating the Fed’s job.
DXY technical outlook: Mild setback near multi-year highs
The US Dollar Index slid below the 109.00 threshold as traders locked in gains following softer inflation readings. Despite the pullback, the broader uptrend remains intact near multi-year peaks with the 20-day Simple Moving Average repelling sellers.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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