Dollar Sags after Mixed US Growth, Inflation Report, Except Against Yen

The U.S. dollar eased against most currencies on Thursday in narrow trading after the economy grew at a surprisingly slow pace in the first quarter and inflation was hotter than expected, potentially tying the Federal Reserve's hands on easing interest rates later this year.

The Commerce Department reported that U.S. gross domestic product grew at a 1.6% annualized rate in the January-March period, slower than the 2.4% rate expected by economists polled by Reuters. Meanwhile, underlying inflation as measured by the core personal consumption expenditures price index climbed 3.7% in the first quarter, eclipsing forecasts for a 3.4% rise.

The inflation surprise puts an even greater-than-usual focus on the release on Friday of PCE price index data for March. The monthly PCE index, and core PCE index factoring out food and energy prices, are among the Fed's most important gauges of price behavior. Inflation remains stubbornly above the U.S. central bank's 2% inflation target.

"The market reaction to the (GDP) data tells all you need to know about what investors are focused on and it's mostly inflation and not growth," said Boris Kovacevic, global market strategist at Convera in Vienna, Austria. "The print on the 3.7% PCE does suggest that tomorrow's PCE number will be higher. Will the dollar rally be sustained in the medium term?"

The U.S. dollar index, a measure of the U.S. currency's value against six major trading partners, reversed a small overnight loss after the data caused benchmark Treasury yields to rise, briefly topping 106.0. It was last at 105.69, off 0.01%.

The Japanese yen, meanwhile, hit a fresh 34-year low versus the dollar and a 16-year low against the euro on Thursday as investors expect a Bank of Japan policy meeting that ends on Friday to not turn hawkish enough to support the Japanese currency.

The greenback was last up 0.1% at 155.545 yen. The dollar peaked at a 34-year high of 155.75 yen, while the euro/yen pair surged to 167.025.

Many investors have seen the dollar/yen 155 level as a line in the sand for Japanese authorities, above which the BOJ could intervene to shore up the currency. The market is on high alert for such central bank action.

The European single currency was up 0.2% on the day at $1.0716.

Following the GDP data, the U.S. interest rate futures market was pricing in about 59% chance of a Fed rate cut in September, down from 70% on Wednesday, according to CME Group's FedWatch tool. Rate futures traders on Thursday were factoring in a 66% chance that the Fed's first rate cut since 2020 could happen at its meeting in November.

"The inflation figures ... potentially even point to the need for a further tightening," said Stuart Cole, chief macro economist, at Equiti Capital in London. "We know that returning CPI (consumer price index) to target is the Fed's main objective and therefore, on balance, today's figure probably pushes an interest rate cut further down the road."

April 26, 2024