Dollar index lowest since August as inflation moderates

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By Karen Brettell

NEW YORK (Reuters) - The U.S. dollar dipped to 16-week lows against a basket of major currencies on Thursday after data showed that U.S. consumer spending increased solidly in October, while inflation moderated, adding to expectations that the Federal Reserve is closer to reaching a peak in interest rates.

The move comes after Fed Chairman Jerome Powell on Wednesday said that it was time to slow rate hikes, noting that "slowing down at this point is a good way to balance the risks."

Investors took comfort from the comments, even as Powell also said that rates would still go higher and that controlling inflation "will require holding policy at a restrictive level for some time."

“We’re seeing the consumer is still keeping up with their spending, and in addition to that continuing claims are rising. So, we’re going to probably start to see that unemployment rate tick higher and I think this is going to support the idea that we’re going to see the Fed is close to done with their tightening cycle,” said Edward Moya, senior analyst at OANDA in New York.

“The markets are going to be a little bit more expecting that yields are going to continue to come down and also that’s going to be a weaker dollar,” Moya added.

Thursday’s data showed that consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.8% after an unrevised 0.6% increase in September.

The personal consumption expenditures (PCE) price index rose 0.3 after advancing by the same margin in September. In the 12 months through October, the PCE price index increased 6.0% after advancing 6.3% in September.

The dollar index fell as low as 104.82 against a basket of currencies, the lowest since August 11 and the euro reached $1.05175, the highest since June 29. The greenback fell as low as 135.75 yen, the weakest since August 19. Sterling also reached $1.22890, the highest since June 27.

Fed funds futures traders are now pricing for the Fed’s benchmark rate to peak at 4.91% in May, up from 3.83% now. The traders had priced for a top of over 5% before Powell’s comments on Wednesday.

Antipodean currencies also rose on expectations that China will ease its strict COVID restrictions.

China is set to announce an easing of its COVID-19 quarantine protocols in the coming days and a reduction in mass testing, sources told Reuters, a marked shift in policy after anger over the world's toughest curbs fueled widespread protests.

The Aussie reached $0.68400, the highest since September 13 and the kiwi hit $0.63995, the highest since August 15.

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Currency bid prices at 9:50AM (1450 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 104.7400 105.7800 -0.97% 9.489% +105.9000 +104.7400

Euro/Dollar $1.0520 $1.0409 +1.07% -7.46% +$1.0524 +$1.0393

Dollar/Yen 135.9300 138.1100 -1.56% +18.09% +138.1100 +135.7500

Euro/Yen 143.00 143.65 -0.45% +9.75% +143.7600 +141.9200

Dollar/Swiss 0.9380 0.9457 -0.79% +2.86% +0.9460 +0.9380

Sterling/Dollar $1.2291 $1.2058 +1.94% -9.11% +$1.2294 +$1.2056

Dollar/Canadian 1.3412 1.3410 +0.04% +6.10% +1.3450 +1.3395

Aussie/Dollar $0.6836 $0.6789 +0.71% -5.95% +$0.6840 +$0.6753

Euro/Swiss 0.9867 0.9839 +0.28% -4.84% +0.9886 +0.9823

Euro/Sterling 0.8557 0.8626 -0.80% +1.87% +0.8642 +0.8554

NZ $0.6396 $0.6297 +1.56% -6.56% +$0.6400 +$0.6294

Dollar/Dollar

Dollar/Norway 9.7250 9.8500 -1.07% +10.62% +9.8480 +9.7450

Euro/Norway 10.2283 10.2355 -0.07% +2.15% +10.2644 +10.2289

Dollar/Sweden 10.3236 10.4905 -0.59% +14.48% +10.5228 +10.3203

Euro/Sweden 10.8575 10.9219 -0.59% +6.09% +10.9515 +10.8388