LONDON — The dollar fell further on Thursday to two month lows after U.S. inflation was weaker than feared in December, prompting investors to cut long positions in the currency. The euro was a big beneficiary of the move, and extended its rise to $1.1479, up 0.3% on the day, while sterling and the yen added to their gains. We apologize, but this video didn't load.
You can see other videos from our team by tapping here. However, traders don't see these inflation readings as urgently changing an already hawkish Federal Reserve. Some investors hedged their bets on further dollar gains after three rate hikes already in the market price. The U.S. index, which measures the dollar against a basket of rival currencies, fell by 0.2% to 94.782. The scale of the dollar sell-off must be partially indicative of positioning, MUFG analyst Derek Halpenny wrote in a research note. Halpenny said that so much Fed tightening was now priced in for the next year, but expectations for longer-term rate hikes were relatively low, keeping the dollar in check. The investors seem to be saying that ending QE quantitative easing hiking rates four times and beginning QT quantitative tightening all in the space of 9 months is so aggressive that it will limit scope for hikes further out. He wrote that it reinforced the belief that peak Fed funds will be below 2%.
The Bank of England is going to get started on hikes soon after the COVID 19 cases and that sterling has been rallying as traders think Britain can survive a surge in COVID 19 cases. The currency is up more than 4% from December lows and traders have shrugged off a political crisis that has enveloped Prime Minister Boris Johnson, who was apologizing for attending a party in the Downing Street garden during a coronaviruses lockdown. Australia's dollar has risen 0.3% to $0.7305 when market sentiment is improving. The Canadian dollar has rallied more than 3.5% in the last three weeks, rising with oil prices as investors look past the economic fallout of the Omicron variant. The dollar doesn't need to increase because the Fed is ready for a tighter cycle, said Joe Capurso, Commonwealth Bank of Australia strategist. It is not a simple equation of Fed hikes equal to dollar increases. The dollar is a counter-cyclical currency that decreases as the world economy recovers.