Dollar dives as investors cheer after US inflation misses forecasts

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The dollar languished on Friday after US inflation data came in cooler than expected, raising market hopes that inflation may have peaked and that the Federal Reserve will begin scaling back its hefty interest rate increases.

Figures showed that the consumer price index rose 7.7% year-on-year in October, the smallest gain since January and below forecasts of an 8% increase.

The dollar tumbled overnight after the release, and recorded its worst day against the Japanese yen since 2016, having fallen 3.7%.

It has since clawed back some of those losses and last rose 0.53% to 141.69 yen.

Sterling saw its best daily gain since 2017, jumping over 3% overnight, along with the Aussie, which surged close to 3%, its largest since 2011.

Against a basket of currencies, the US dollar index slumped more than 2% overnight, the most in over a decade. It last stood at 108.06.

“The overnight moves in the dollar were pretty sharp … I do think the results in the US CPI for October will support the case for a downshift in the FOMC rate hike in December,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

“The Japanese government officials will certainly be happy about the drop in dollar/yen overnight … it was mainly driven by the sharp drop in US Treasury yields.”

US Treasury yields moved decisively lower overnight as investors revised down their expectations of where U.S. rates could peak, with the benchmark 10-year Treasury yield slipping below 4% to its lowest in over a month.

In early Asia trade, the dollar was fighting to recoup some of its losses, with the euro last 0.31% lower at $1.0179, after rising nearly 2% overnight.

The kiwi edged 0.43% lower to $0.6001, following a 2.4% overnight gain.

The pound clung to most of its overnight gains and was last down 0.32% at $1.1673, while the Aussie slipped 0.42% to $0.65915.

Fed funds futures show that markets are pricing in a 71.5% chance of a 50-basis-point rate increase and a 28.5% chance of a 75 bp increase at the Fed’s December meeting, as compared to a nearly-evens chance a week ago.

“There were flickers of encouragement in the October CPI release, but this pattern would need to be repeated in coming months for confidence to grow that inflation will moderate towards trend over the Fed’s forecast horizon,” said economists at ANZ.

Also at the top of investors’ minds on Friday was the ongoing turmoil in the crypto world after crypto exchange FTX’s fall from grace.

FTX is scrambling to raise about $9.4 billion from investors and rivals, a source told Reuters.

Various institutional investors and officials have also since spoken out on the matter.

Cryptocurrencies remained under pressure, with FTX’s native token, FTT, last 5% lower at $3.537, having fallen nearly 90% month-to-date.

Bitcoin fell 0.3% to $17,501, after plunging below $16,000 for the first time since late 2020 earlier in the week.