U.S. Dollar Surges on Inflation Data

By Karen Brettell
NEW YORK (Reuters) – The U.S. dollar jumped to a one-week high against the Japanese yen on Wednesday after data showed that consumer prices rose more than economists expected in January, increasing the likelihood that the Federal Reserve will maintain higher interest rates as it tackles inflation.

U.S. consumer prices saw their largest increase in nearly 1.5 years, impacting costs for a variety of goods and services.

The headline Consumer Price Index (CPI) rose by 0.5% in January, while the core index rose 0.4%, both exceeding expectations of 0.3%.

Headline consumer price gains were recorded at 3.0% for the year, surpassing forecasts of 2.9%, and core prices rose at an annual pace of 3.3%, above the predicted 3.1%.

Adam Button, chief currency analyst at ForexLive in Toronto, noted, “The takeaway is no matter what the reason was for the upside surprise, the Fed has been very clear that it won’t cut rates until inflation is close to 2%.” He suggested that current inflation trends make reaching that target increasingly difficult.

Interest rate futures traders now anticipate 27 basis points of cuts by December, down from 37 basis points prior to the inflation data, indicating a likelihood of only one 25-basis-point cut this year.

The dollar rose 1.29% to 154.44 Japanese yen, as the Japanese currency reacts significantly to interest rate differentials between the U.S. and Japan. The dollar index increased 0.02% to 107.95, after peaking at 108.52 earlier.

The greenback’s gains moderated as traders took profits and assessed whether January’s inflation report was an anomaly, with Thomas Simons, chief U.S. economist at Jefferies, stating, “January is a tricky month because a lot of annual price increases are announced… We are not inclined to expect a repeat next month.”

Fed Chair Jerome Powell reiterated that the central bank has no intention of rushing to cut interest rates, although he acknowledged “great progress” on inflation during a congressional hearing.

In Europe, the euro rose by 0.27% to $1.0388 after Bundesbank President Joachim Nagel emphasized the European Central Bank should implement policy changes gradually, avoiding targeting a difficult-to-define “neutral” level for interest rates.

Traders are also monitoring the potential impact of tariffs from the Donald Trump administration, which could exacerbate inflationary pressures. James Knightley, chief international economist at ING, stated, “Potential tariffs add upside risk to inflation in coming quarters.”

The Trump administration is expected to announce reciprocal tariffs against any country imposing duties on U.S. imports by Thursday, with plans to increase tariffs on steel and aluminum to 25% effective March 4.

In cryptocurrencies, bitcoin rose 0.80% to $97,162.44.