NEW YORK/LONDON- The dollar retreated against major currencies on Friday as market speculation continues to swirl about the timing of Federal Reserve interest rate cuts amid signs of cooling yet persistent inflation and a softening US economy.
While consumer prices for April, reported on Wednesday, rose less than expected – leading to a risk-on flavor in equity markets – various Fed officials have sounded words of caution about when rates may fall, limiting the dollar’s decline this week.
The dollar index which tracks the US currency against six peers, slid 0.04 percent to 104.44 after earlier trading about 0.3 percent higher.
“The market has turned cautious on the prospect for rate cuts in the near term. The overall picture, though, does appear consistent with a fading of the US exceptionalism trade,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“We are seeing signs of slowing momentum in the US economy,” Schamotta added. “All of that is translating into less upward pressure on the dollar at the same time you are seeing a brightening of prospects elsewhere.”
Futures markets reduced the outlook for lower US rates, with less than 45 basis points of cuts seen by December, down from almost 50 on Wednesday, and a cut of 21 bps in September, down from almost 25 bps.
“The market over-reacted perhaps on Wednesday, and now we’re seeing a little bit of that over-reaction come off and that inflation could re-accelerate,” said Matt Weller, global head of research at FOREX.com in Grand Rapids, Michigan.
US inflation accelerated in the first quarter amid strong domestic demand after moderating for much of last year. Last month’s slowdown was a relief after data on Tuesday showed a jump in producer prices in April.
Policymakers said on Thursday that still-high inflation warrants keeping rates at current levels, and that reaching the Fed’s 2 percent inflation target will take longer than previously thought.
