The Dollar Gains Ground as US Inflation Data Puts the Fed in a Bind.
The dollar moved higher on Tuesday as traders ignored a relatively good reading of consumer pricing data and attempted to predict whether the Federal Reserve will raise interest rates next week, following the failure of two banks that triggered broad market concern.
The dollar index, which measures the value of the dollar against six other currencies, increased 0.096% as Treasury rates rose a day after the two-year note plummeted the most in a single day since 1987. The euro fell 0.11% to $1.0717, as the dollar rose versus the safe-haven yen and Swiss franc.
Fed funds futures also revealed a shift in sentiment, with the chance of the Fed remaining unchanged at the end of its two-day policy meeting on March 22 decreasing to 13.6%, according to CME's Fed Watch Tool.
Investors are divided on whether the Fed would raise rates again next week in response to the failures of Silicon Valley Bank and Signature Bank, which triggered financial market turbulence. This year's dollar gain has been driven by higher US interest rates than those on foreign government debt.
"The Fed's near-term decisions are more likely to be dictated by financial markets and what the financial system demands, rather than what the inflation mandate requires," said Brian Daingerfield, Nat West Markets' co-head of G-10 FX strategy. "Regardless of the financial circumstances swings that we have witnessed, this number was fairly good," he added of the CPI print.
The Consumer Price Index (CPI) increased 0.4% in February after increasing 0.5% in January. The CPI rose 6.0% in the year to February, less than the 6.4% annualized advance in January but still well below the Fed's 2% objective.
Last month, Americans faced stubbornly increasing housing rents and food prices, providing a quandary for the Fed after banking stocks were crushed by the bankruptcy of the two banks.
"It's pretty evident, especially given the recent volatility in financial markets, that this figure being strong might perhaps lead the Fed to move more aggressively at this meeting, 50 basis points," Daingerfield said.
"However, the expectation has shifted. The market sees this figure as a little more retrograde "said. Futures markets are pricing in a Fed rate drop before the end of the year, with the terminal rate at 4.45% in December, down from more than 5% last week.