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Dollar ahead as inflation worries resurface after OPEC+ surprise
The US dollar was broadly higher as fears over inflation resurfaced after a surprise announcement by major oil producers to cut production further, with traders wagering the Federal Reserve may need to increase interest rates at its next meeting.
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United States one-dollar banknotes are seen in front of displayed stock graph in this illustration taken on Feb. 8, 2021. (Reuters/Dado Ruvic)
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he US dollar was broadly higher as fears over inflation resurfaced after a surprise announcement by major oil producers to cut production further, with traders wagering the Federal Reserve may need to increase interest rates at its next meeting.
The announcement from the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, comes after data on Friday showed US consumer spending rose moderately in February after surging the prior month, with inflation showing some signs of cooling even as it remained elevated.
"While receding broader contagion risks, positive developments in China and expectations that the Fed is nearing the end of the tightening cycle should keep sentiments broadly supported, the oil price gain due to the surprise production cut is a fresh risk to inflation," said Christopher Wong, a currency strategist at OCBC in Singapore.
"Fresh inflation risks do imply the inflation fight is not over."
The euro was down 0.44 percent to $1.0791, after touching a one-week low of $1.0788, while the Japanese yen weakened 0.46 percent to 133.41 per dollar. Sterling was $1.2277, down 0.45 percent on the day. The dollar rose 0.32 percent against the Swiss franc.
The dollar index, which measures the US currency against six peers, was 0.078 percent higher at 103.01, breaking past 103 for the first time in a week.
The OPEC+ cuts caused oil price increases of more than 6 percent on Monday. O/R
The cuts were announced even before a virtual meeting of the OPEC+ ministerial panel, which includes representatives from Saudi Arabia and Russia, that was expected to stick to cuts of 2 million barrels per day (bpd) already in place until the end of 2023.
Instead, the oil producers on Sunday announced further output cuts of around 1.16 million bpd.
The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 4.6 basis points at 4.108 percent. The yield on 10-year Treasury notes was up 2.9 basis points to 3.519 percent.
Markets are now pricing in the probability of the Fed hiking rates by a quarter point in May to 61 percent, from 48 percent on Friday. But, by the end of the year, expectations are priced in for cuts of 40 basis points.
Friday's report from the US Commerce Department showed that personal consumption expenditures price index rose 5.0 percent in February from a year earlier, down from the 5.3 percent increase in January. A measure of core inflation - seen as a better gauge of future price increases - came in a shade lower than expected at 4.6 percent.
Additional data also showed US consumer sentiment fell for the first time in four months in February on concerns of an impending recession, although the impact of the banking crisis was muted.
Citi strategists said concerns over financial stability are fading and any drag from tighter credit is likely to be both lagged and limited.
"Still, the recent experience likely will keep the Fed more cautious in raising rates and markets more cautious in pricing hawkish policy," Citi strategists said in a note, adding they expect 25 basis point hikes at the next three Fed meetings.
The risk-sensitive Australian dollar fell 0.30 percent to $0.667 ahead of a high-stakes policy meeting from the Reserve Bank of Australia this week, with markets betting the central bank will stand pat on interest rates after 10 interest rate hikes.
The kiwi slid 0.62 percent to $0.622, its biggest one-day percentage drop since March 24.
