Dollar dropped to three-week low as concerns over inflation subsided

Dollar dropped

The dollar neared three-week lows against the euro and yen on Wednesday after a higher-than-expected rise in U.S. consumer prices. It did not stoke concerns of accelerating inflation and the Federal Reserve’s tapering.

The dollar’s index against a basket of six major units hit a three-week low of 91.791 and last stood at 91.831.

“Inflation has been expected to accelerate in the April-June quarter. Although the latest reading was a bit stronger than expected, it wasn’t out of the blue,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

The dollar’s rally in the first quarter was fueled by speculation that firmer inflation would prompt the Federal Reserve to reduce its quantitative easing and low interest rates earlier than planned.

But the dollar lost momentum as U.S. bond yields fell on Tuesday, making the dollar less attractive for yields as strong demand at a 30-year bond auction trumped inflation concerns.

The Fed has stated that it would consider temporary increases in inflation. The analysts believe it will allow inflation to run hotter than previously expected before raising rates.

“Eventually there will be another large scale fiscal stimulus, which should support the dollar,” Mizuho’s Yamamoto also added.

Damon Harrison
Market Analyst, IPG Group