US dollar holds seven-week high after strong inflation data

NEW YORK: The dollar held a seven-week peak on Friday, as another round of data showing still-high inflation reinforced expectations that interest rates could stay higher for longer.

Hotter-than-expected data has helped the greenback to strengthen against many of its major peers this week, sending the dollar index up 0.6% at 105.20 to a seven-week high and putting it on track to post its largest weekly gain since late September.

The euro was also on pace to post its biggest weekly loss against the dollar since late September.

Stoking the dollar’s recent surge is the personal consumption expenditures (PCE) price index, tracked by the Federal Reserve for monetary policy, which rose 0.6% last month after gaining 0.2% in December. The PCE price index accelerated 5.4% in the 12 months through January, after rising 5.3% in December.

Consumer spending, which accounts for more than two-thirds of US economic activity, jumped 1.8% last month, according to the Commerce Department. December’s data was revised higher to show spending dipping 0.1% instead of falling 0.2% as previously reported. Moreover, sales of new US single-family homes increased 7.2% in January, the highest level since March 2022. December’s sales pace was revised higher to 625,000 units from the previously reported 616,000.

“Strong US data have completely turned the market in February. Good news has been bad news, with rates and equities selling off and the US dollar up. The US economy seems to be re-accelerating, forcing the Fed to hike more, in a market that was hoping for early Fed pivot,” said Athanasios Vamvakidis, global head G10 FX strategy at Bank of America in London.

“Unemployment remains historically low in every single G10 economy and has yet to increase in any of them during monetary policy tightening so far,” Vamvakidis added. “The market’s reality check will be complete when both good news and bad news are bad news, which should be the case when inflation is high and sticky, and the Fed committed to bringing it down.”