Title: Dollar at two-decade high as CPI keeps aggressive U.S. rate hikes likely

May 12, 2022 02:46AM ET

By: AnalysisWatch

The dollar hit a 20-year high on Thursday after US inflation slowed less than markets expected, suggesting the Federal Reserve will remain committed to aggressively tightening policy.

The safe-haven greenback also received a boost from a decline in global equity markets as investors worried that central banks were lagging in reining in consumer prices and that growth was already threatened by China's ongoing COVID-19 freeze.

Higher-risk currencies such as the Australian and New Zealand dollars fell, as did cryptocurrencies.

The dollar index, which measures the value of the greenback against six other major currencies, rose 0.1% to 104.22, its strongest level since December 2002.

The consumer price index rose 8.3% year-on-year in April, down from March's 8.5% but beating economists' forecasts for 8.1%.

According to these data, inflation may have peaked, but it is unlikely to cool sharply and disrupt the Fed's current monetary policy plans.

According to the CME FedWatch tool, the market is pricing in at least a half-point increase in the federal funds rate in each of the Fed's next two decisions on June 15 and July 27.

The CPI data for May will come five days before the Fed's June meeting, and another "shock" would make a 75 basis point hike very likely, according to the tool.

The euro hovered around $1.0595 after getting a boost overnight when the European Central Bank confirmed expectations that it would raise its main interest rate in July for the first time in more than a decade.

The British pound weakened as Brexit headlines resurfaced. The Attorney General of England and Wales told the government that it was legally able to cancel large parts of the Northern Ireland deal, the Times reported.