LONDON: The dollar stabilised on Friday and major currency pairs were stuck within recent ranges as markets shrugged off Thursday's high US inflation number, believing the Federal Reserve's stance that it is likely to be a temporary blip.
US consumer prices rose 5% year-on-year in May, the biggest jump in nearly 13 years.
Currency markets had been sluggish all week in anticipation of the data, but when it came in above expectations, there was little market reaction. The Federal Reserve has repeatedly said that it expects any rise in inflation to be temporary and that it is too soon to be discussing reducing its monetary stimulus.
The dollar index edged lower in the Asian session but picked up later in the day. At 1056 GMT it was up 0.1% on the day at 89.995. It was on track for a small weekly gain of 0.1%.
"We agree with the Fed that elevated inflation pressures will prove short-lived," UBS strategists said in a note to clients.
"Both Federal Reserve and European Central Bank policymakers have been unusually consistent in stressing that policy will only need to be tightened if inflation becomes more sustained -which they currently view as unlikely."
There were signs of slightly increased risk appetite in currency markets, with the Australian dollar up against the US dollar. But the British pound slipped to $1.4159.
A dovish stance from the ECB at its meeting on Thursday had little effect on the euro, which slipped on Friday to $1.2152 and was set for a small weekly loss of around 0.1%. A gauge of euro-dollar implied volatility over a six-month horizon was at its lowest since early March 2020, almost back to the levels it was at before the Covid-19 pandemic caused volatility to spike.
Neil Jones, head of FX sales at Mizuho, said he was getting a lot of questions from clients about central banks that are likely to raise rates before the Fed and the ECB.
"There's some interest in going long those currencies because of potential longer-term FDI (foreign direct investment), inward investment flows. Money could gravitate towards those economies that are at the forefront of coming out of the pandemic," he said.
The British pound, Canadian dollar, Australian dollar and New Zealand dollar are currencies that may gain against a weaker US dollar, Jones said.
ING strategists wrote in a note to clients that the "glut of liquidity" from central banks was driving a search for "carry". In currency trading, "carry" refers to gains from holding higher-yielding currencies.
"This environment should continue to see the dollar gently offered against those currencies with good stories (monetary tightening or commodity exposure) and a little carry," ING said.
Russia's central bank increased its key interest rate to 5.5% on Friday, increasing the cost of lending for the third time this year due to rising inflation, and said more hikes would be needed.
Elsewhere, in cryptocurrencies, bitcoin recovered slightly this week while ether was set for a 9% weekly drop. Both have stabilised so far this month but are still trading significantly below their mid-May peaks.
Attention now turns to the Fed meeting next week. The central bank is likely to announce in August or September a strategy for reducing its massive bond-buying program, but won't start cutting monthly purchases until early next year, a Reuters poll of economists found. Meanwhile, leaders of the Group of Seven wealthiest economies are meeting in the English seaside resort of Carbis Bay. Although the meeting is not expecting to contain market-moving events, if the leaders agree to provide more vaccines to countries where there is a shortage, then those countries' currencies could benefit, Mizuho's Jones said.