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On Thursday, April 13, the U.S. dollar dipped to a two-month low against a basket of currencies and a one-year low against the euro, after the producer price index (PPI) for final demand unexpectedly fell by 0.5% in March, indicating a possible end to the Federal Reserve's rate hiking cycle. In the last 12 months, the PPI rose by 2.7%, the smallest year-on-year increase since January 2021, following a 4.9% advance in February. This came after the consumer price index (CPI) data on Wednesday revealed that inflation fell to 5% year-on-year in March, down from 6% in February. Consequently, the markets are interpreting the data as signalling that we are headed back to a low inflation world.
Adam Button, Chief Currency Analyst at ForexLive in Toronto, noted that "The next big trade is that the inflation scare is over." Fed funds futures traders are pricing for the Fed's benchmark rate to peak at 5.01% in June, from 4.830% now, before falling back to 4.34% in December. The dollar index dropped to 100.84, the lowest since Feb. 2. The euro rose to $1.10680, the highest since April 1, 2022, being boosted by a relatively more hawkish European Central Bank, which is expected to keep raising rates to tackle inflation.
Additionally, new claims for unemployment benefits increased more than expected last week, indicating that labour market conditions were loosening as higher borrowing costs dampened demand in the economy. The next major U.S. economic release will be retail sales on Friday, which will be analysed for how inflation is affecting consumer spending.
The Australian dollar, which is sensitive to risk appetite, rose by around 1.4% on the day, reaching $0.67965, the highest since Feb. 24. Australian employment surpassed expectations for a second month in March while the jobless rate held near 50-year lows. This strong report suggests that the central bank's tightening campaign may not be over yet.