On Friday, the dollar was on track for its biggest two-day drop in nearly 14 years as investors piled into riskier assets following a lower reading of US inflation, which helped temper expectations for the Federal Reserve to keep raising rates as quickly. The dollar index was down nearly 1% after losing more than 3% in the previous two days, its biggest two-day drop since March 2009.
Consumer inflation rose 7.7% year on year in October, the slowest rate since January and less than the 8% expected. The dollar fell to its lowest level since late 2015 on Thursday as Treasury yields fell, while other currencies, particularly the yen and the pound, rose.
Chinese health authorities eased some of the country’s strict COVID-19 restrictions, including shortening quarantine times for close contacts of cases and inbound travelers, boosting investor appetite for risk.
Stocks, emerging-market currencies, and commodities all rose in value. Slowing inflation, while beneficial to borrowers, reflects a slowing economic backdrop, according to analysts.
According to Reuters, Rabobank currency strategist Jane Foley stated that the “bad news” is still out there and could come back to bite us, particularly with regard to the Fed. The dollar has gained 12% against a basket of major currencies this year, reflecting the Fed’s determination to return inflation, which nearly reached double digits earlier this year, to its target of 2%.
With the exception of the Bank of Japan, other central banks have followed suit, resulting in the yen’s largest decline against the dollar since 1979. The dollar, which has gained 22% against the yen this year, the most since 1979’s 24% gain, was last down 1% against the Japanese currency, trading at 139.54 yen.
The yuan also rose as investors welcomed a slight relaxation in China’s COVID rules, despite the fact that cases were increasing sharply across the country. The offshore yuan rose by as much as 1.3% to 7.0592 per dollar, its highest level in over a month.
Meanwhile, sterling recovered overnight losses against the dollar and the euro after UK data showed the economy did not contract as much as expected in the three months to September, despite the fact that the country is still in what is likely to be a long recession.
The pound rose 0.4% against the dollar to $1.1756 after staging its biggest one-day rally since 2017 the day before, while it fell 0.4% against the euro to 87.47 pence. The euro extended its 2% gain from the previous day, rising 0.8% to $1.0296, its highest level since August.
Investors are pricing in a 71.5% chance of a 50-basis-point rate increase in the United States next month, up from around 50/50 a week ago, according to the futures market.
“We remain reluctant to jump in on the broader bearish dollar story just yet,” Reuters wrote, quoting ING strategist Francesco Pesole as saying. Pesole went on to say that it appears too early to call victory in the battle against inflation and that more evidence will need to come from the labor markets, which have remained exceptionally tight.
Cryptocurrencies were under pressure once more, owing to the ongoing turmoil in the crypto world following the collapse of exchange FTX. FTX’s native token was last down 7.4% at $3.45 after falling nearly 90% this month. Bitcoin fell 1.3% to $17,348 this week after falling below $16,000 for the first time since late 2020.
