US Dollar Rallies on Producer Price Index Surge, Volatility to Continue through upcoming Currency Trading
The US dollar rallied sharply on the day, as much stronger-than-expected Advance Retail Sales figures and Producer Price index results shifted outlook for the future of Federal Reserve interest rate policy. Markets pulled back forecasts for the future of Fed interest rate cuts, as Producer Prices showed their largest month-over-month gain in 34 years. Traders feared that surging energy prices would derail inflation expectations for the world’s largest economy, and US Treasury Bond yields rose significantly in the wake of the report. Longer-term money market rates likewise erased yesterday’s declines, and higher US yields clearly boosted the attractiveness of the dollar against major forex counterparts. The previously downtrodden greenback rose against almost all major liquidly traded currencies, but declines in the Dow Jones Industrial Average left the dollar slightly lower against the Japanese Yen.
The Bureau of Labor Statistics reported that Producer Price Index growth hit its highest levels since 1974 through the month of November, instantly boosting forecasts for the future of Federal Reserve interest rate targets. Indeed, speculators scaled back hopes that the Fed would continue to cut interest rates through the medium term, with a notable jump in 2-year money market and bond yields underlining the significance of the report. The typically stable 2-year swap rate instantly jumped 5 basis points to 4.09 percent in the wake of the PPI numbers, while the equivalent US Treasury Note yield added 7 basis points to 3.20 percent. Such interest rate shifts instantly boosted the attractiveness of the domestic currency, and forex speculators bought dollars on improved yield differentials against major counterparts.
Currency trading markets are likely to see similar volatility through tomorrow’s trading, with the critical Consumer Price Index report due at 13:30 GMT (08:30 EST). The surge in producer prices will likely translate into a stronger CPI gain, and such a result could only further boost forecasts for the future of US Federal Reserve interest rates. It will be important to watch for any strong surprises in the data, as the dollar is likely to remain volatile to close the week’s trading.
Written by David Rodríguez, Currency Analyst for DailyFX.com
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