The US dollar experienced a significant downturn on Thursday after data showed that US core inflation had slowed to its lowest rate in three years. Core US inflation, which measures price increases excluding food and energy costs, decreased from an annualized 3.8% in March to a 3.6% annualized rate in April.
This figure matched market expectations but raised hopes among investors that the Federal Reserve might soon begin reducing interest rates.
The market is, of course, very sensitive to signs of inflation from wherever it may come, and the import price series that we got today was meaningfully stronger than expected
Brian Daingerfield
According to the Bureau of Labor Statistics, the import price index for US goods rose by 0.9% in April, marking the largest monthly increase since March 2022. This data raised concerns that the Fed's efforts to combat inflation might not be effective, potentially delaying policymakers' plans to cut interest rates.
Richmond Fed President Thomas Barkin and Cleveland Fed President Loretta Mester both emphasized that it was important for the Fed to continue its fight against high inflation before considering rate cuts.
Despite the decrease in inflation, higher borrowing costs remain a concern for many Americans, including those hoping for lower mortgage rates before buying homes and Wall Street traders awaiting a cut.
The US government recently released April's inflation report, which showed a slight moderation in inflation to 3.4% annually, aligning with the forecasts of economists.
To tackle the inflation issue, which hit a high point of 9.1% in June 2022, the Federal Reserve has bumped its interest rate to 5.3%, reaching a level not seen in over a decade. Despite these sharp increases, Americans' average spending on interest and principal for their debts remained relatively unchanged, rising from 9.5% in 2020 to 9.8% in the last quarter of 2022.
Many Americans were able to refinance their mortgages at low rates during the pandemic when the Fed kept its key rate near zero, resulting in largely unaffected finances for these individuals. The current standard rate for securing a new 30-year mortgage hovers around 7.1%. The spread between present borrowing costs and past averages for outstanding debt has expanded to its maximum extent since the 1980s.
The president of the Federal Reserve's Minneapolis branch, Neel Kashkari, implied that, given certain circumstances, the housing industry and the economy overall may not fully absorb the Fed's interest rate adjustments within a shorter timeframe.
Currency and economic figure shifts
The decrease in inflation has also led to a narrowing of the interest rate differential between the United States and Japan, causing the yen to rally against the dollar. The Australian dollar also reached a four-month high against the US dollar at $0.6714 but then paused due to an unexpected rise in unemployment.
Bitcoin's price has seen an upward movement of over 7%, reclaiming its stance above the 100-day moving average. It is currently trading at a value of $60,908.17. Meanwhile, gold advanced by 0.39% on Thursday, approaching its record high of $2,431.29 from April 12.
There was a 0.07% decline in the US dollar index, which brought its value to a five-week low of 104.12. At the same time, the euro appreciated against the dollar, reaching $1.0867. The New Zealand dollar attained its highest point in the past two months, reaching $0.6140. Simultaneously, the British pound touched its peak in a month, trading at $1.1268.
Treasury yields dropped to new six-week troughs in Tokyo trading, and US retail sales figures showed that spending was flat instead of the expected 0.4% gain in April.
With consumers and businesses alike sheltered from higher interest rates thanks to pandemic-era debt paydowns and refinancing, their aggregate interest burden is not yet historically elevated
Tom Barkin
In the first quarte, Japan's economy shrank more than anticipated, adding complexity to the task for officials aiming to raise interest rates from their almost zero base.