NEW YORK: The dollar weakened on Tuesday after data showed a less-than-expected rise in US inflation last month, creating uncertainty about the timing of the Federal Reserve’s tapering of its asset purchases.
Several Fed officials have suggested the US central bank could reduce its buying of debt securities by the end of the year, but noted that an eventual interest rate hike would not happen for some time.
The Fed will hold a two-day monetary policy meeting next week, with investors keen to find out whether a tapering announcement will be made.
Tapering tends to benefit the dollar as it suggests it would be one step closer toward tighter monetary policy. It also means the Fed will be buying fewer debt assets, effectively reducing the number of dollars in circulation.
Data on Tuesday showing the US consumer price index excluding the volatile food and energy components edged up just 0.1% last month has raised doubts about tapering this year, some analysts said.
August’s CPI rise was also the smallest gain since February and followed a 0.3% rise in July. The so-called core CPI increased 4.0% on a year-on-year basis after advancing 4.3% in July.
“We didn’t get a really high number on CPI, the fact that they came in just below expectations gives the Fed the chance to punt any taper implementation announcement from September to November,” said Thomas Hayes, managing member at Great Hill Capital LLC in New York.
“The inflation numbers confirmed that the Fed can push it off a little bit more because there were worries if inflation numbers came in really hot then the Fed’s hand might be forced to move sooner rather than later, in spite of recent employment numbers being weak,” he added.
The dollar index slipped 0.1% to 92.498, further retreating from more than a two-week high on Monday.
The euro rose 0.1% against the dollar to $1.1816. Against the Swiss franc, the dollar dropped 0.2% to 0.9201 francs.
“Another slowing in headline and core price inflation during August is probably a relief for FOMC members who have been concerned that the rapid pace of inflation is testing the limits of the term ‘transitory,’” Wells Fargo said in a research note, referring to the policy-setting Federal Open Market Committee.
“We remain comfortable with our call for a taper announcement to come in November or December.”