Dollar Edges Lower; Inflation Concerns Prompt Strong Week

The dollar edged lower in early European trade Friday, taking a breather after the week’s gains, as traders digest the latest inflation data and the potential impact on Federal Reserve policy.

At 3:05 AM ET (0805 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 90.532, but still around 0.5% higher so far this week.

EUR/USD traded 0.3% higher at 1.2109, GBP/USD was up 0.1% at 1.4068, and USD/JPY was down 0.1% at 109.39. Additionally, AUD/USD rose 0.2% to 0.7744, while NZD/USD rose 0.3% to 0.7192.

Thursday saw the release of factory gate price data in the U.S., with the producer price index rising 0.6% in April after surging 1.0% in March. The annual figure shot up 6.2%, the biggest year-on-year rise since the series was revamped in 2010 and followed a 4.2% jump in March.

This strong data adds to Wednesday’s stunning jump in consumer prices, suggesting inflationary pressure is building up in the United States as vaccine rollouts prompt a reopening of an economy bursting at the seams with stimulus.

That said, Federal Reserve officials have been at pains to point out that they had expected a spike in inflation and that it would prove to be temporary, the latest being Fed Governor Christopher Waller.

“The factors putting upward pressure on inflation are temporary, and an accommodative monetary policy continues to have an important role to play in supporting the recovery,” Waller told a virtual event Thursday. “We will not overreact to temporary overshoots of inflation.”

Benchmark 10-Year U.S. Treasury yields failed to rise to any great degree after the PPI data, and now trade around 1.65%.

“Although we are likely to see blockbuster growth in the second half of the year, economic growth will likely slow next year, to strong but less impressive growth rates,” said analysts at ABN Amro, in a note. “Overall, we do not expect sustained high inflation over the coming years, but it is certainly the risk to watch.”

For today, the focus will be on U.S. retail sales for April, which should remain strong after the impressive 9.7% rise in March, as well as industrial production numbers and consumer sentiment for May.