Dollar hits a two-month low following U.S. data

The U.S. Dollar Currency Index dropped 0.7% to 94.944, after slipping as low as 94.903, its lowest since Nov. 11

The dollar dropped to a two-month low against a basket of currencies on Wednesday after data, which showed an expected surge in U.S. consumer prices in December, fell short of offering any new impetus for the Federal Reserve's policy normalization efforts.

The U.S. Dollar Currency Index dropped 0.7% to 94.944, after slipping as low as 94.903, its lowest since Nov. 11.

U.S. consumer prices surged in December, with the annual increase in inflation the largest in nearly four decades, which could bolster expectations that the Federal Reserve will start raising interest rates as early as March.

The consumer price index increased 0.5% last month after advancing 0.8% in November, the Labor Department said on Wednesday. In the 12 months through December, the consumer price index surged (CPI) 7.0%, the biggest year-on-year (YOY) increase since June 1982.

The U.S. economy appears ready for interest rate lift-off to start in March, said Joe Manimbo, senior market analyst at Western Union Business Solutions.

The dollar's problem though is that the market already has highly hawkish expectations for Fed policy this year. So as hot as today's CPI price was, it merely reinforced what's already baked in for the dollar and Fed policy, Manimbo said.

Federal Reserve Chair Jerome Powell on Tuesday gave no clear indication that the Fed was in a rush to speed up plans for tightening monetary policy, putting some downward pressure on the greenback which has benefited from U.S. rate-hike expectations in recent weeks.

It's just a case of the market currently getting too ahead of itself with Fed normalization; we will need to see this inflationary impact from Omicron really play out for the Fed to hike four times and embark on quantitative tightening this year I think, said Simon Harvey, senior FX market analyst at Monex Europe.

While we don’t think today’s CPI release will derail the Fed’s likely liftoff in March, continued reports of narrow inflation pressures will likely lead markets to trim expectations of the normalization cycle across 2022 as a whole, which will undoubtedly result in sustained USD depreciation, Harvey said.

Traders have priced in an about 80% chance of a rate hike in March, according to CME’s FedWatch tool.