Dollar advances to six-week peak after strong US retail sales data

NEW YORK: The dollar rose to a six-week high against a currency basket on Wednesday after hotter-than-expected US retail sales data last month, coming a day after a report showing stubbornly high US consumer prices, suggesting that the Federal Reserve will keep monetary policy tight to curb inflation.

The greenback also advanced to a fresh six-week peak versus the yen.

Data showed that US retail sales surged 3.0% last month, increasing by the most in nearly two years. The numbers for December were unrevised to show sales dropping 1.1% as previously reported. Economists polled by Reuters had forecast sales would increase 1.8%, with estimates ranging from 0.5% to 3.0%.

That report followed Tuesday’s data on the US consumer price index (CPI) inflation, which accelerated month-on-month in January, rising 0.5% as expected, due in part to higher rental and food costs.

Year-on-year, prices rose 6.4%. That was down from 6.5% in December but above economists’ expectations of 6.2%.

“The market continues to lean on the most recent trends since the payrolls report that (suggests) the Fed may have to do more, boosting the dollar and contributing to the idea that the balance of risks is tilted towards slightly higher rates,” said John Briggs, global head of economics & markets strategy, at NatWest Markets.

In late morning trading, the dollar index rose 0.7% to 103.99, after hitting a six-week peak of 104.06. Against the yen, the dollar surged to 134.185 yen, the highest since Jan. 6. It was last up 0.8% at 134.14 yen.

The euro, meanwhile, fell against the dollar, and last traded at $1.0674, down 0.6%. “It is a reaction to the CPI data, and also the tone of Fed officials recently,” said Jane Foley, head of FX strategy at Rabobank.

“The market is now expecting a higher peak for the Fed funds rate than they were expecting even a week or two ago.”

In December, Fed board members’ median projection foresaw interest rates peaking at 5.1% this year. But interest rate futures markets have priced a peak above 5.2%, based on late Tuesday’s prices, and traders are becoming less sure that cuts are coming in 2023. Rates currently stand at 4.5% to 4.75%.

Fed officials struck a tough tone on Tuesday.

“With the strength in the labour market, clearly there are risks that inflation stays higher for longer than expected, or that we might need to raise rates higher,” New York Fed President John Williams said in New York.

Deutsche Bank’s economists said they now expect the Fed to raise rates as high as 5.6%, having previously expected a 5.1% peak.

Sterling dropped 1.5% to $1.1998 after British inflation cooled more than expected in January to 10.1%, alleviating some of the pressure on the Bank of England to keep hiking rates.

Also on investors’ radars was an announcement by Scottish First Minister Nicola Sturgeon that she would step down after eight years in the job.

The Australian dollar fell 1.6% to US$0.6872. Australia’s central bank chief Philip Lowe told members of parliament that rates still had a way to rise.

Meanwhile, China’s yuan traded onshore hit a more than one-month low at 6.8560 to the dollar, which was last up 0.3% at 6.853.