The dollar languished at two-week lows against a basket of major currencies as expectations that monetary policy divergence would continue to raise demand for euro and yen assets limiting advances in the greenback offset growing signs of inflationary pressure.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, fell 0.18% to 88.74.
The Labor Department said Thursday its producer price index for final demand increased 0.4% last month after slipping 0.1% in December. In the 12 months through January, the PPI rose 2.2%.
The U.S. Department of Labor reported Thursday that initial jobless claims increased 7,000 to a seasonally adjusted 230,000 for the week ended Feb. 10 in line with economists’ forecasts.
The PPI data added to the narrative of improving inflation following Wednesday’s bullish CPI print, leading many to suggest that the Federal Reserve would adopt a more hawkish stance on monetary policy.
TD securities added an additional Federal Reserve rate hike to its 2019 forecast, estimating three rate hikes in both 2018 and 2019, while suggesting that the central bank could adopt four rate hikes for each year should the economic impact of the tax and spending fiscal policy be larger than expected.
The dollar weakness in the wake of growing expectations for a faster pace of Fed rate hikes has puzzled some market participants, while others pointed to global monetary policy divergence as a factor limiting upward momentum in the greenback.
“The Dollar sell off Wednesday in spite of higher Fed tightening probability reinforces our view that monetary policy divergence is raising the attractiveness of euro and yen assets to international investors,” Mizuho said. “This will translate into wider Treasuries spread to Bund, in particular at the long-end.”
Euro and yen strength was prevalent in Thursday’s session, as the latter rose after Japan’s finance minister said there was no reason to intervene in FX markets despite the sharp rise in the yen over recent sessions.
USD/JPY fell 0.30% to Y106.69, while EUR/USD added 0.19% to $1.2475.
USD/CAD gained 0.10% to C$1.2505 while GBP/USD rose 0.38% to $1.4051 following a surge in UK gilt yields to their highest in two years.