Dollar tumbles from 20-year high as US inflation eases

The dollar fell two weeks ago from a 20-year high as signs of rising inflation in fuel speculation in the US that the Federal Reserve will soon reduce its rate of increase.

The greenback has fallen more than 4 percent against a basket of six peers so far in November, leaving it on track for its biggest monthly fall since September 2010, according to Refinitiv data. It’s up about 11 percent this year so far.

This month’s fall comes as investors scrutinize early signs that US inflation may finally be easing, potentially paving the way for the Fed to slow the pace at which it has been raising borrowing costs. Other data, such as those in the housing and manufacturing sectors, also suggested that the broader economy is facing headwinds, another factor that hinders the Fed’s monetary tightening.

“Everything points to the US and with that we will see a slowdown in the US economy in the first quarter of next year. . . That forms the basis of the weak dollar story, said Thierry Wizman, a Macquarie expert.

The decline of the dollar has eased the pressure on the world economy that has been growing under pressure from the strong dollar, which is helping to increase the rate of inflation in small economies and adding to the debt consolidation problems of countries and companies – especially in emerging markets – that have borrowed heavily in US currency.

A line chart of the Dollar index showing the US dollar falling from a 20-year high

The euro rose to nearly $1.04 after sinking below 96 cents in September, and the UK pound’s recovery from September’s lows has been further extended. The yen rebounded from a slide to a 32-year low against the dollar prompting the Japanese government to spend billions propping up its currency.

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Still, much depends on how the Fed reacts to data showing US consumer and producer prices grew at a slower annual pace in October than in September – even if that continues. At the November central bank meeting, chairman Jay Powell did not clearly indicate the fifth consecutive percentage increase of 0.75 percent, which traders understood as a sign of the Fed’s openness to a half-percentage rate increase next month.

Signs of rising inflation have boosted popular bets on currency markets with a strong dollar.

“We expect the strong rise in the US dollar over the past year to reverse in 2023 as the Fed hiking cycle comes to an end,” foreign exchange strategists at HSBC wrote to clients this week. “It’s too high.”

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In recent weeks, traders have adjusted their bets on a stronger dollar to the lowest level in a year, according to figures from the Commodity Futures Trading Commission, which provide a snapshot of how speculative investors such as hedge funds are positioned in financial markets.

The greenback’s historic rise earlier this year came as rapid inflation swept the world, prompting major central banks – except the Bank of Japan – to rapidly tighten monetary policy. But inflation elsewhere largely failed to match the Fed, which because of the strong US economy was able to raise borrowing costs faster than peers in other developed economies, supporting the dollar’s appeal.

At the same time, the fear of a global recession and the financial market instability produced by the rapid strengthening of the currency also tends to favor the US currency, which as the safe haven of the global financial system tends to rise in times of stress.

Both of these rallies are now set to end, according to HSBC, which said “gravity should hold” the dollar as volatile trading in global bond markets, caused in part by central bank rate hikes, calmed.

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Despite the market volatility, a few hawkish statements from Fed officials in recent days have hit bets that the Fed is tapering.

The dip “looks like an overreaction given Fed speakers so far have made it clear that the job is not done”, said Athanasios Vamvakidis, head of G10 foreign exchange strategy at Bank of America.

While the dollar may not exceed a 20-year high as of the end of September, Vamvakidis warned that inflation remains high. “We are not out of the woods yet. . . Even if inflation gets too high it will stick and fluctuate on a downward path. ”

With traders firmly focused on monthly inflation in the US, a small surprise can cause the entire world financial market to go back in the opposite direction, he added.

That sentiment was reflected in the comments of St. Louis Fed president James Bullard on Thursday, who said rates would need to be raised at least 5 percent to moderate inflation.

Positions in the futures market now indicate that investors see interest rates rising to 5 percent in May.

“It’s too early to call a peak for the dollar, because the Fed expects inflation,” said Joe Manimbo, an analyst at Convera.

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