U.S Dollar Bulls In A Coma Amid High Inflation Data

Despite U.S. inflation figures showing solid rises in prices last month, longer-dated Treasury yields fell Wednesday, and Federal Reserve minutes confirmed tapering will begin “soon.”

Market analysts were expecting a 0.3% rise in consumer prices last month, but the index rose 0.4%. CPI rose by 5.4% on a year-over-year basis, up from 5.3% in August. The core CPI, which excludes volatile food and energy components, climbed 0.2% in September, compared to 0.1% in August.

Treasuries yields declined after the report, indicating that the market has not priced in sustained inflation yet. Short-term interest rate expectations usually follow higher yields.

After widening to a three-and-a-half-month high on Friday, the gap between two- and ten-year Treasury notes closed to its narrowest in two weeks.

In any case, a taper in November is inevitable, unless something extreme happens. Although the 0.2% monthly gain in Core CPI is somewhat more moderate, a 4% gain is still high.

If the Fed announced a drastic change, it would undermine its credibility. The greenback earlier rose before the report because the markets think that way.

Market participants are seeing a major pivot here as inflation is showing more signs of being persistent than transitory, which will make the Fed look like a fool for not hiking rates earlier than expected.

Rates were previously forecast to rise in December 2022, but the Market is now expecting one in September.

A measure of the greenback’s strength against six rival currencies, the dollar index, fell more than 50 basis points to settle around 94 index points on Wednesday.

In the past couple of months, the dollar has had a significant move higher, and now this is likely going to trigger a pullback.

The rise in energy prices has fueled inflation concerns, raising the possibility that the Federal Reserve might have to act sooner than predicted to normalize policy.

The dollar is likely to suffer once the dust settles – possibly by Friday’s Retail Sales report. The markets may be reminded that the economy remains depressed despite tapering, and that might favor a weaker dollar.