While the dollar was hardly shaken against the beleaguered yen, it otherwise only rose briefly after the Commerce Department reported that U.S. GDP rose at a 1.6% annualised rate in the January-March period
The U.S. dollar dropped on Thursday, except against the yen, wavering after data showed unexpected slowing in economic growth and an unwelcome inflation acceleration, potentially tying the Federal Reserve’s hands on a pivot to lower interest rates.
While the dollar was hardly shaken against the beleaguered yen, it otherwise only rose briefly after the Commerce Department reported that U.S. GDP rose at a 1.6% annualised rate in the January-March period.
The report also showed that underlying inflation as measured by the core PCE price index gained 3.7% in the first quarter, eclipsing forecasts for a 3.4% increase.
The inflation surprise puts an even greater-than-usual focus on the release on Friday of PCE price index data for March. The PCE index, and core PCE index factoring out food and energy prices are among the Federal Reserve’s most important gauges of price behaviour. Inflation remains stubbornly above the Fed’s 2% inflation target.
The market reaction to the GDP data tells all you need to know about what investors are focused on and it is mostly inflation and not growth, according to Boris Kovacevic, global market strategist at Convera in Vienna, Austria.
He said: The print on the 3.7% PCE does indicate that tomorrow’s PCE number will be higher.
The yen, meanwhile, reached a new 34-year low versus the dollar and a 16-year low against the euro on Thursday as investors expect a BOJ policy meeting that ends on Friday to not be hawkish enough to support the Japanese currency.
The dollar index reversed a small overnight loss after the data caused benchmark Treasury yields to increase, topping at 106.00. It was at 105.60, off 0.21%.
Conversely, the greenback dropped as low as 155.31 yen after the GDP data, but quickly reversed to sit 0.19% higher at 155.63.
It peaked at a 34-year high of 155.75 yen, while the euro/yen pairing soared to 167.025, a 16-year high.
Investors guessed the dollar/yen 155 level would be a line in the sand for Japanese authorities, above which the BOJ could intervene to shore up the currency. But it is a moving target and the market has been on high alert for such central bank action since the yen dropped below 152 per dollar around two weeks ago.
I think that Japanese officials have been very clear that they are not really looking at a specific level, according to Marc Chandler chief market strategist, at Bannockburn Global Forex in New York.
He said: We should expect a hawkish hold from the BOJ where they hold policy and they talk about how the weakness of the yen could contribute to inflation and which they’d respond to.
The euro rose 0.26% to $1.0725. Sterling firmed 0.35% to $1.2504.
