NEW YORK: The dollar strengthened on Thursday after US consumer prices rose more than expected in September on a still elevated cost of rent that bolstered the prospect of the Federal Reserve keeping interest rates high for some time.
The Labor Department’s report on Thursday showed the annual increase in consumer prices last month, excluding the volatile food and energy components, was the smallest in two years.
But owners’ equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, shot up 0.6% compared to non-official sources showing a decline in rental prices.
“People who know about this divergence don’t worry too much about this number,” said Thierry Wizman, Macquarie’s global FX and interest rates strategist in New York.
“Since the Fed makes its decisions based on the official numbers, not on what third party sources are showing, it’s a little bit worrisome” though eventually they converge, he said.
The dollar index rose 0.615% to 106.310, while the euro declined 0.63% to $1.055.
“Even though September was a blip, I don’t think that it negates the overall picture of the declining inflation. I don’t think that this is going to cause (the Fed) to hike,” Wizman said. “The only thing that the market is missing is that somehow it thinks that the Fed is going to drop high for long.”
The dollar’s recent weakness has been driven by declining Treasury yields as bond prices rallied on the Fed’s softer stance on future rate rises. Bond yields move opposite to their price. The yield on 10-year Treasuries rose 4.2 basis points (bps) to 4.6388%.
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