By James Ramage
The dollar rose against the euro and the yen on Friday after the
U.S. posted strong inflation numbers for April, likely nudging
forward market expectations for higher borrowing costs.
Numbers for U.S. inflation increased for a third consecutive
month, particularly those that exclude volatile food and energy
components, or "core" prices. The Federal Reserve watches inflation
numbers closely, alongside labor market data, in determining the
health of the U.S. economy and whether to raise interest rates for
the first time since 2006.
The dollar strengthened against the common currency, with one
euro buying $1.1016 from $1.1172 ahead of the numbers. The
greenback has gained 0.8%, rising to a three-week high and erasing
early morning losses. The dollar increased to Y121.52 against the
yen from Y120.90 beforehand, now trading 0.4% higher on the
day.
"This inflation report is good for the dollar," said Vassili
Serebriakov, currency strategist at BNP Paribas. "This number
suggests that the Fed, at least on the inflation front, is not that
far from the threshold for starting to raise rates."
The dollar has proven volatile particularly against the euro
since last summer. Many investors bet against the common currency
as the European Central Bank began its large-scale stimulus program
in March. By mid-March the euro pared some of the dollar's large
gains as the U.S. economy muddled through soft first-quarter data
while the eurozone began to show signs of recovery and growth.
The dollar has strengthened throughout much of the week, and
received a boost after the U.S. consumer-price index, which
reflects what Americans pay for goods and services, increased a
seasonally adjusted 0.1% last month from March, the Labor
Department said. "Core" prices increased 0.3%, the largest gain
since January 2013. Economists had forecast overall prices to rise
0.1% and core prices to climb 0.2%.
Stronger inflation numbers join those for jobless claims and
housing starts in giving investors a sense that the U.S. economy is
pulling itself out of a slump that dragged growth down to just 0.2%
for the first three months of 2015. Many in the markets had
expected the economy to expand at a healthy pace and for the Fed to
raise interest rates, a move that would make the dollar attractive,
while central banks in Japan and the eurozone were still easing
policy.
When soft U.S. economic numbers persisted into April, some
investors pushed out interest-rate expectations into 2016.
Fed-funds futures, which traders and investors use to bet on Fed
policies, showed that investors see 61% odds for a rate increase in
December, compared with 55% before the numbers, according to CME
Group. Investors also see a 46% chance of a rate increase in
October, against a 38% probability ahead of the numbers.
Still, BNP Paribas S.A. and some investors, predict the Fed will
move to raise interest rates around September.
"This makes a September rate hike more probable," Mr.
Serebriakov said. "It strikes against the complacency that the Fed
won't be able to move at all this year."
Write to James Ramage at james.ramage@wsj.com