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Dollar Retreats as Timid Inflation, Tillerson Exit Spooks Markets

3/14/2018, 11:55:40 AMBasics of Trading
Dollar Retreats as Timid Inflation, Tillerson Exit Spooks Markets

The dollar fell against a basket of major currencies Tuesday as timid U.S. inflation dented investor expectations for a faster pace of rate hikes while U.S. political uncertainty weighed on sentiment.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, fell 0.30% to 89.562. The dollar index fell from a session high of 90.10.

The Labor Department said on Tuesday its Consumer Price index rose 0.2% last month after edging up 0.3% in January. The year-on-year increase in the CPI was unchanged at 1.8%.

“The lack of momentum in the core will also heighten the argument among the more dovish members that the Fed should remain cautious with no sense of immediacy to hike rates,” said Stifel on Tuesday following the release of the inflation data.

The investment firm warned that while a March rate hike is priced into the market, further tightening of monetary policy would be difficult to justify should the pace of inflation fail to improve.

“At this point, a March rate hike is priced into the market as it has been since Chair Yellen’s press conference back in December of last year. But going forward, should inflation fail to "move up" as the Committee outlined in the January FOMC statement, a further removal of accommodation will be difficult to justify,” Stifel added.

USD/JPY gave back some of its gains after renewed political uncertainty in Washington stoked demand for safe-haven yen.

President Donald Trump fired Secretary of State Rex Tillerson, after the two failed to reconcile their differing views on the Iran nuclear deal. Trump hired Central Intelligence Agency Director Mike Pompeo as Tillerson’s replacement.

“When you look at the Iran deal, I think it's terrible. I guess he thought it was OK,” Trump said. “I wanted to either break it or do something and he felt a little bit differently, so we were not really thinking the same.”

Also weighing on the greenback was a sharp rise in GBP/USD as traders cheered an upbeat UK Spring Budget Statement from UK Chancellor Philip Hammond.

USD/CAD rose 0.65% to C$1.2925 as the ongoing slump in oil prices continued to weigh on the oil-price sensitive loonie.

EUR/USD rose 0.48% to $1.2399.