NEW YORK (Reuters) - The U.S. dollar fell on Wednesday, as equity markets rebounded quickly following a stronger-than-expected inflation data report.
The announcement that the U.S. core Consumer Price Index posted its biggest gain in a year raised expectations that price pressures may accelerate, prompting a faster pace of interest rate increases from the Federal Reserve. The possibility that the Fed would clamp down on inflation initially drove up the dollar index .DXY.
But the dollar quickly fell to a session low of 89.231 against a basket of currencies, as the equity market recovered from earlier losses and Treasury bond yields remained range-bound.
The riskoff trade - that is, the sale of riskier currencies in emerging markets and the Australian and Canadian dollars in favor of safer havens - that investors put on immediately after the CPI release “have come bouncing back, helped by equity resilience,” said Alan Ruskin, global head of currency strategy at Deutsche Bank in New York.
After opening lower at the bell, the S&P 500 .SPX rose to 2,686.9, its highest since Feb. 8. The Dow Jones Industrial Average .DJI followed the same trend, opening lower before rising to 0.5 percent above its last close.
The dollar’s limited rise may have also been related to a surprise decline in U.S. retail sales in January.
“Retail sales truly disappointed,” said Juan Perez, senior FX trader and strategist at Tempus, Inc in Washington. “They kept the dollar from blowing up after stellar CPI. People need to be buying things in order for the economy to grow and it seems like we’re lacking on that.”
As the market digested the data, initial perceptions of the importance of the CPI print may have waned. “With an expected slowdown in PCE (personal consumption expenditures) in January, I think that’s probably going to mix some of the sentiment at the Fed,” said Lennon Sweeting, chief market strategist at XE Money Transfers in Toronto.
As the dollar weakened, both sterling and the euro recovered. At 12:47 p.m. EST (1747 GMT) the British pound GBP= was at $1.398, up 0.65 percent from Tuesday's close.
The single currency EUR= was at $1.242, up nearly half a percent from its last close, supported also by stronger-than-expected euro zone industrial production data for December.
The yen rose to a 15-month high against the dollar at 106.70 JPY= earlier in the day. The Japanese currency was last at 107.03.
“The fact that the yen has still hung in there, and is still stronger vis-à-vis the dollar suggests that in this instance the tail isn’t going to wag the dog,” said Ruskin. “In other words, the squeeze that you’ve had on yen crosses from things like the Aussie dollar are not being translated into (the dollar/yen) ... the dollar/yen could have gone higher in that environment.”
Reporting by Kate Duguid; Editing by Andrew Hay and Rosalba O'Brien
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