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USDX: US dollar gains traction as consumer inflation accelerates

H.S. Borji
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The US dollar advanced against a basket of currencies Wednesday, rising to its highest level in nearly two weeks as American consumer prices unexpectedly rose in September.

The US dollar index, a weighted average of the world’s most actively traded currency, rose 0.46 percent to 85.69, its highest level since October 10. Wednesday marked the second consecutive daily advance for the dollar index, which has traded to the downside in recent weeks amid monetary policy speculation.

The dollar advanced against five of the six currencies in the weighted-average index.

The dollar advanced against the euro, as the EURUSD tumbled 0.37 percent to 1.2666.

The dollar edged higher versus the Japanese yen, as the USDJPY climbed 0.14 percent to 107.22.

The greenback outperformed the Swiss franc, as the USDCHF rose to an intraday high of 0.9534. The pair would subsequently consolidate at 0.9534, advancing 0.3 percent.

The dollar declined against its Canadian counterpart, as the USDCAD fell 0.17 percent to 1.1206.

In economic data, the cost of living in America unexpectedly rose in September, a sign inflationary pressures were slowly building in the world’s largest economy. At 1.7 percent annually, however, inflation remains muted, which could compel the Federal Reserve to keep interest rates at rock bottom for a while longer.

The consumer price index, a gauge of inflationary pressures in the United States, rose 0.1 percent in September, following a decline of 0.2 percent a month earlier, the Commerce Department reported in Washington. Economists forecast no change. This translated into an annualized CPI rate of 1.7 percent.

Weak inflation is considered to be a key justification for low interest rates, as Fed officials deliberate about eventual policy normalization. The central bank is widely expected to end its record quantitative easing program later this month by reducing bond purchases one final time by $15 billion.

October would mark the eighth successive occasion the Federal Reserve has tapered bond purchases.

Although analysts are convinced the Fed will end QE next week, they are less certain about when the first rate-hike will occur. The minutes of the September Federal Open Market Committee meetings revealed central bankers were concerned about weak global growth and acknowledged the downside effects of a higher US dollar.

“Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the US external sector,” read the minutes of the September 16-7 FOMC meetings.

Policymakers expressed similar concerns about China, Japan, Ukraine and the Middle East.

“At the same time,” the minutes continued, “a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC’s 2 percent goal.”

Expectations of an earlier rate hike sent the US dollar soaring over the summer. At its heights, the dollar index reached 86.68 on October 3. That represented a gain of 8.6 percent in only three months.

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