Dollar struggles to hold gains after US reports jump in inflation

NEW YORK: The US dollar was volatile on Wednesday morning after inflation data showed a surge in consumer prices in April, as it struggled to hold the gains it initially notched on the data release.

The dollar index, which measures the US currency against a basket of rivals, was last up 0.25% on the day to 90.437, having risen as high as 90.665 immediately following the consumer price index report. Rising prices typically strengthen the dollar because the market believes the Federal Reserve will raise interest rates to quell inflation. But Fed Chair Jerome Powell has pledged to keep rates anchored and to allow inflation to run higher for a period.

The Labor Department report on Wednesday showed US consumer prices increased more than expected as booming demand in the reopening economy pushed against supply constraints. The consumer price index jumped 0.8% last month versus the 0.2% forecast by economists polled by Reuters. The so-called core CPI, which excludes the volatile food and energy components, rose 0.9% versus the 0.3% forecast.

"The dollar is really going to struggle to hold onto gains," said Mazen Issa, senior foreign exchange strategist at TD Securities.

In addition to base-year effects, which Issa believes will peak in May, "The surge in prices you see in the CPI report are also a reflection of reopening pressures. Those should be transitory in nature. The old adage of - one data point doesn't make a trend - applies here."

The boomeranging dollar pulled other G10 currencies with it, ultimately leaving the euro 0.42% weaker at $1.210. The single currency on Tuesday had hit a 2-1/2 month high. The Japanese yen was 0.54% weaker on the day at 109.225 and the British pound was modestly weaker, down 0.14% to $1.412.

Currency markets this week have been soothed by repeated promises of patience from Fed speakers. St. Louis Federal Reserve President James Bullard said on Tuesday he expects inflation could stay as high as 2.5% next year, while Fed Governor Lael Brainard said weak labor data last week shows the recovery has a long way to run.

"The Fed has made it clear in no uncertain terms that they intend to look through transitory inflation factors and they are not perturbed by these moves," said Issa.

In the digital space, cryptocurrency ether was roughly 2.93% higher on the day, having backed off a record level of $4,372.35 set earlier in the day.