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Producer Inflation Boosts US Dollar

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Producer Inflation Boosts US Dollar

The US dollar strengthened for the third consecutive day amid signs inflation was gaining traction toward the end of 2013.

The greenback rose half a percent to 81.05 against a basket of its major competitors after producer prices rose at the fastest pace in six months, official data from the Labor Department showed today. The Producer Price Index, which monitors monthly price fluctuations in primary markets, rose at an annual rate of 1.2 percent in December.

On Thursday the Labor Department is expected to show consumer prices rose at an annual rate of 1.5 percent in December, according to a median estimate of economists polled by Thomson Reuters. If accurate, this would bring inflation within half a percentage point of the Federal Reserve’s 2 percent target. Stronger inflationary pressures will give the Federal Reserve little choice but to continue paring asset purchases in the coming months.

The dollar steamrolled against its competition Wednesday, strengthening against its safe haven and commodity-driven peers. The dollar rose more than 0.3 percent against the Japanese yen, consolidating at 104.63 yen. The trend index continues to show bullish uptake for the USDJPY pair, with technical resistance ahead at 104.97.

In Europe, the British pound fell another 64 pips to 1.6372 US, while the euro shed 72 pips to 1.3602 US. Pound sterling has lost more than 1.1 percent against the greenback in 2014, while the euro has depreciated by nearly three-quarters of a percent.

Down-under, the Australian dollar fell 44 pips to 0.8910 US, as investors look ahead to Thursday’s employment data. Meanwhile, the idle New Zealand dollar fell 33 pips to 0.8334.

As inflationary pressures continue to mount, the Federal Reserve may consider implementing a more aggressive QE exit strategy. The Fed has eased around $4 trillion into the financial markets since November 2008.

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