The dollar dropped on Tuesday as statistics revealed that underlying consumer price inflation in the United States increased less than anticipated last month. It increased the likelihood that, after a two-day meeting, the Federal Reserve will decrease the rate of rate increases.
After the numbers were released, the dollar's value against the euro fell to its lowest level in six months. The euro reached $1.0666, its highest level since June, up 1.1% from its previous close of $1.0648.
The U.S. dollar recently traded at 134.94 yen, a loss of 1.9%, having dropped to a one-week low of 134.67 yen against the yen.
The Dollar Index measured the U.S. dollar's value concerning six major currencies, which fell 1.1% to 103.82.
According to data, consumer prices in the United States climbed marginally on an annual basis in November despite falls in the cost of gas and used automobiles. This was the smallest annual increase in inflation in nearly a year. The CPI grew 7.1% in the 12 months through November, the lowest gain since December 2021, with an increase of 7.7% in October behind it.
The CPI increased by 0.2% in November after increasing by 0.3% in October, excluding the impact of increases in the price of food and energy. Following a 6.3% increase in October, the so-called core CPI increased 6.0% in the 12 months leading up to November.
According to Richard Flax, chief investment officer at Moneyfarm in London, “as a starting point, it’s a positive signal that inflation has gradually moved lower from very high levels to where central banks would like it to be.”
“In a longer-term perspective, it shows that it is a long process, but still, it’s another data point to suggest that inflation will begin to come down towards the targeted 2%, which should be positive for households and positive for risky assets.”
Against commodity currencies, the dollar also saw significant declines.
At its highest point against the dollar, the Australian dollar was worth US$0.6879, a 1.9% increase. The value of the New Zealand dollar increased to US$0.6490, a 1.7% increase from its previous level. The U.S. dollar dropped 0.5% against the Canadian dollar to C$1.3555.
The report lent credence to the widely held belief that the Fed will announce a smaller-than-expected rate increase on Wednesday.
Futures contracts on the federal funds rate have already discounted to a terminal rate of 4.8%, the point at which the Fed will halt its rate hikes for May. It had been around 5.1% at the end of the previous month, so that was a significant drop.
According to Moneyfarm’s Flax, “the consensus view is that the peak rate is maybe a little bit below 5% which we believe will be reached sometime in the second quarter of next year.”
“We broadly subscribe to the view that markets expect a relatively quick shift from the Fed from raising interest rates till now to cutting rates over a relatively short period. Our perspective is that the market is pricing in the possibility that the Fed stays at its peak rate for a little bit longer.”