The dollar index witnessed a retreat on Friday following unexpected declines in U.S. producer prices for December, igniting expectations of an early U.S. rate cut. The index, which had initially seen gains, was buoyed by safety buying after U.S. and British military actions in Yemen.
The producer price index for final demand reported a 0.1% dip last month, primarily attributed to a decrease in the cost of goods, while prices for services remained unchanged. This unexpected development increased the likelihood of lower inflation in the months ahead, prompting traders to increase bets on an impending rate cut.
According to the CME Group’s FedWatch Tool, Fed funds futures now suggest a 79% probability of a rate cut in March, up from 73% on Thursday. Steve Englander, head of Global G10 FX Research at Standard Chartered Bank NY Branch, noted, “Even though you wouldn’t say overall that the macroeconomic picture is screaming at you that they need to cut that fast, the market seems to be excited about the prospect of cuts.”
Traders maintained their stance on a likely rate cut in March, despite consumer price inflation data on Thursday surpassing economists’ expectations. The dollar index was last up 0.19% at 102.40.
The New Zealand and Australian currencies initially surged in response to the data, only to pare gains later in the day. Englander suggested that higher beta currencies might respond more significantly as long as the market perceives a willingness by the Federal Reserve to cut rates.
The kiwi was last up 0.22% on the day at $0.62460, while the Aussie remained little changed at $0.66870. Foreign exchange moves were likely tempered by traders closing positions ahead of the U.S. long weekend, with markets closed on Monday for the Martin Luther King Jr. holiday.
The U.S. currency initially benefited from risk aversion following the strikes on Yemen, which were in retaliation for attacks by Iran-backed Houthi forces on Red Sea shipping. Geopolitical tensions also led to gains in the Norwegian krone as oil prices rose.
The euro, sensitive to higher energy costs, dipped 0.15% to $1.09555. The dollar fell 0.29% against the Japanese yen to 144.87. Sterling dropped 0.12% to $1.27470 after data on Friday showed that Britain’s economy grew slightly more than expected in November but remains at risk of a mild recession.
In the cryptocurrency market, bitcoin stood at $43,643, down more than 5% from its recent surge to a two-year high of $49,051. The surge came after the U.S. Securities and Exchange Commission green-lighted ETFs linked to bitcoin.