HONG KONG The euro and Japanese yen were sitting pretty on Thursday morning after U.S. inflation data came in less hot than expected and sent the dollar tumbling.
Consumer prices in the US were unchanged in July compared to June, when prices rose by a monthly 1.3 per cent. The July result was lower than expected due to a drop in the cost of petrol, which caused markets to reposition on hopes that inflation was peaking.
If price rises have reached their zenith, investors expect the U.S. Federal ReserveFederal Reserve to not have to maintain its eye-wateringly steep rate of interest rate hikes, which had previously supported the dollar.
The euro was at $1.0297 on Thursday morning after jumping 0.84 per cent the day before, its biggest daily percentage gain since mid-June.
The yen was at 132.83 per dollar, after the dollar fell by 1.6 per cent overnight on the Japanese currency, which is particularly sensitive to moves in the U.S. yields.
The Nasdaq's shares and short-dated treasuries rallied on the news, which pushed the two-year treasury yield to 3.2141 per cent more than its June low, seven basis points lower than its previous close. MKTS GLOB U.S. Treasuries were not trading in early Asia due to a holiday in Japan.
Analysts at Standard Chartered said that the decline in the dollar seemed to be driven by improvements in investors' attitude to riskier assets, other than the move against the yen, which they said was more of a yield play.
They wrote in a note about the surprise downward inflation move takes out much of the fear that the market had a 75 bps Fed hike or even inter-meeting moves.
We suspect that many investors did not want to put on positions ahead of an important number that could have gone either way, so some of the post-CPI moves probably reflect the delayed buying of risk-correlated positions. Markets are pricing in a 57.5 per cent chance of a 50 basis point increase in interest rates at the Fed's next meeting, but another 75 basis point increase remains possible, according to the CME's Fedwatch tool.
After the data showed that they would continue to tighten monetary policy until price pressures were fully broken, the Fed policy makers warned in public that they would continue to tighten monetary policy until price pressures were broken.
The Australian dollar, another commonly used proxy for risk sentiment, was at $0.7077 after a 1.7 per cent overnight gain, and sterling was on the front foot at $1.2207.
The recent highs of $24,000 were tested by the coin, which has traded in line with risk assets.