The US dollar faced a significant downturn on Wednesday as consumer prices in the United States rose less than expected in March, leading experts to speculate that the Federal Reserve may halt its rate-hiking efforts, possibly after a rate increase in May. This development could have a profound impact on the global economy, as the Fed’s monetary policy decisions carry significant weight.
The latest data revealed that the Consumer Price Index (CPI) only climbed by 0.1% last month, falling short of economists’ forecasted 0.2% gain, and marking a decrease from the 0.4% rise observed in February. Over the past 12 months leading up to March, the CPI increased by 5.0%, which represents the smallest year-on-year gain since May 2021. In comparison, the CPI had risen by 6.0% on a year-on-year basis in February.
Excluding the volatile food and energy components, the CPI increased by 0.4% last month after rising by 0.5% in February, with core CPI being driven by sticky rents.
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“Headline inflation coming down more than expected is backing the view of the Fed being basically one more and done,” said Joe Manimbo, senior market analyst at Convera in Washington, D.C. in a report, as quoted by Reuters.
As a result of this development, the dollar index dropped to 101.68, down 0.41% on the day and below the level of around 102.11 before the data was released. The euro reached $1.09900, the highest since Feb. 2, and was last at $1.0967, up 0.48% on the day. The dollar also dipped to 133.04 Japanese yen, from around 133.85 before the data.
According to fed funds futures traders, there is a 69% chance that the Fed will increase rates by 25 basis points at its meeting on May 2-3. However, this probability has decreased from approximately 76% prior to the latest data.
Market analysts are now closely monitoring the upcoming retail sales data on Friday to gauge how consumer spending is being affected by higher prices.