US dollar drifts lower as market in consolidation post-inflation data

By Gertrude Chavez-Dreyfuss and Joice Alves

NEW YORK/LONDON (Reuters) – The dollar inched lower on Wednesday after rising in the previous session on hotter-than-expected U.S. inflation data, as investors consolidated gains ahead of more economic data this week that could further shed light on when the Federal Reserve would start cutting interest rates this year.

The U.S. consumer price index (CPI) increased solidly in February, beating forecasts and suggesting some stickiness in inflation.

Although the CPI rose 0.4% in February in line with forecasts, a 3.2% year-on-year gain came in just ahead of an expected 3.1% increase. Core figures also topped estimates.

Markets see little chance of a Fed cut before the summer, but expectations for rate cuts in June have eased only a touch to about a 67% likelihood versus 71% earlier in the week, according to LSEG’s rate probability app.

In late morning trading, the dollar index, which measures the greenback against a basket of peer currencies and last week recorded its biggest weekly decline since early January, slipped 0.1% to 102.85. On the year, however, the greenback has posted gains so far of 1.5%.

“We think the implications (of the CPI report) for near-term shifts in Federal Reserve policy are minimal – officials know not to extrapolate early-year inflation data forward,” said Karl Schamotta, chief market strategist, at Corpay in Toronto.

“But a slightly more hawkish tone should come through in communications over the next month, keeping risks tilted to the upside for the dollar,” he added.

Investors are now looking to Thursday’s U.S. retail sales data, the producer prices index (PPI) report, and jobless claims for more evidence that the economy is slowing down.

Last week, Fed Chair Jerome Powell said the U.S. central bank was “not far” from gaining the confidence it needs in falling inflation to begin cutting rates.

Elsewhere, sterling edged 0.1% higher to $1.2804 as data showed Britain’s economy returned to growth in January after entering a shallow recession in the second half of 2023.

The euro also rose, up 0.2% against the dollar at $1.0943.

According to the results of a long-awaited European Central Bank framework review, the ECB wants to wean banks off free cash but it will try to do that at a gentle enough pace not to disrupt the financial system or credit creation.

ECB policymaker Francois Villeroy de Galhau said the ECB would probably start cutting rates during the spring, between April and June 21, as “victory” against inflation was in sight.

In the meantime, data showed higher cost of borrowing is denting the euro zone economy, with industrial production decreasing by 3.2% in January from the previous month.

Against the yen, the dollar was 0.1% higher 147.81 yen. The Japanese currency saw its biggest fall in a month on Tuesday following Bank of Japan Governor Kazuo Ueda’s slightly bleaker assessment of the nation’s economy.

Traders are now looking to the initial estimates of spring wage negotiations to be announced on Friday. The results will be crucial for the BOJ’s policy calculations on whether to exit negative interest rates at its meeting on March 18-19.

Expectations are for bumper pay raises, with a number of Japan’s biggest companies already saying they had agreed to fully meet union demands for pay increases.

The country’s largest trade union confederation has demanded pay rises of 5.85% this year, surpassing 5% for the first time in 30 years.

In cryptocurrencies, bitcoin hit a fresh record high of $73,678. It was last up 2.71% at $72,549.

Ether was up 0.5% at $3,971.

(Reporting by Gertrude Chavez-Dreyfuss in New York and Joice Alves in London, Brigid Riley in Tokyo; Editing by Mark Potter and Jonathan Oatis)