Dollar steady after benign US inflation eases worries over rates

SINGAPORE: The dollar was steady on Monday after US inflation data showed only a modest rise last month, easing some concerns about the pace of US rate cuts next year, while the yen loitered near 156 per dollar, raising the possibility of intervention.

Investor sentiment was also lifted when a US government shutdown was averted by congress’ passage of spending legislation early on Saturday.

In a holiday-curtailed week, trading volumes are likely to thin out as the year-end approaches.

The Federal Reserve last week shocked the markets by projecting a measured pace of rate cuts ahead, sending Treasury yields and the dollar surging while casting a shadow on other economies, especially in emerging markets.

Friday’s data on the Fed’s preferred gauge of inflation showed moderate monthly rises in prices, with a measure of underlying inflation posting its smallest gain in six months.

Still, the annual increase in core inflation, excluding food and energy, remained stubbornly well above the US central bank’s 2% target.

Traders are pricing in 44 basis points of rate cuts next year, just shy of the two 25 bp rate cuts the Fed projected last week. It had projected four cuts in September. Market pricing has pushed the first easing of 2025 out to June.

That left the dollar index, which measures the US currency against six of its largest peers, steady at 107.78 on Monday, near a two-year high of 108.54 touched on Friday.

The euro was languishing at US$1.0434, near a two-year low it touched in November, and is down 5.5% this year.

“When optimism is rising and market multiples are expanding, it just takes a little fear to take the veneer off a market rally,” said Brian Jacobsen, chief economist at Annex Wealth Management.

“This year has had a number of setbacks that in hindsight were just bumps in the road. At the time they felt like existential crises. Perhaps the Fed talking about two cuts in 2025 instead of four is just another one of those bumps.”