Dollar slips after CPI data as Fed expectations in check

NEW YORK, May 11 (Reuters) – The dollar was lower on Wednesday after economic data showed inflation remained high but was unlikely to lead the Federal Reserve to shift to a more aggressive path of monetary policy.

The consumer price index rose 0.3% last month, the smallest gain since August, the Labor Department said on Wednesday, versus the 1.2% month-to-month surge in the CPI in March, the largest advance since September 2005.

On an annual basis, CPI climbed 8.3%, higher than the 8.1% estimate but below 8.5% the prior month.

The data signaled inflation may have peaked but was unlikely to quickly cool and derail the Fed’s current plans to tighten monetary policy.

The dollar index, which had touched a four-session low of 103.37 ahead of the report, immediately strengthened to a session high of 104.13 following the data, just below the two-decade high of 104.19 reached on Monday.

“Hope springs eternal here but at the end of the day markets are correct in thinking these inflation pressures are ultimately transitory, that we should see a diminishment in supply chain issues and demand as well for the coming months,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.

“Essentially to me, the challenge here is inflation expectations are well anchored across the spectrum … ultimately traders will look through this and we will see a bit of a reversal in the trend that we are seeing right now.”

The greenback has climbed more than 8% this year as investors have gravitated towards the safe haven on concerns about the Fed’s ability to tamp down inflation without causing a recession, along with worries about slowing growth arising from the war in Ukraine and rising COVID-19 cases in China.

Still, the dollar was choppy in the wake of the data as it retreated from its session high and last =USD fell 0.029% at 103.890, with the euro down 0.07% to USD 1.052.

After the Fed raised its benchmark overnight interest rate by 50 basis points last week, the largest hike in 22 years, investors have been attempting to assess how aggressive the central bank will be. Expectations are completely priced in for another hike of at least 50 basis points at the central bank’s June meeting, according to CME’s FedWatch Tool.

Atlanta Fed President Raphael Bostic said on Wednesday that rising interest rates on home mortgages, U.S. Treasury bonds and other credit instruments show the central bank remains credible in its attempts to thwart rising inflation.

Investors will get another look at inflation data on Thursday in the producer price index for April, with expectations of a monthly increase of 0.5% versus the 1.4% jump in March. On an annual basis, expectations are for a jump of 10.7% compared with the 11.2% surge the prior month.

The euro gained as European Central Bank has firmed up expectations that it will raise its benchmark interest rate in July for the first time in more than a decade to fight record-high inflation, with some policymakers even hinting at further hikes after the first.

The Japanese yen strengthened 0.48% versus the greenback at 129.79 per dollar, while sterling GBP= was last trading at USD 1.2258, down 0.52% on the day.

In cryptocurrencies, bitcoin BTC= last fell 3.88% to USD 29,797.31, after falling below USD 30,000 for the first time since July on Tuesday.

(Reporting by Chuck Mikolajczak; Editing by Alison Williams and Cynthia Osterman)

BUZZ-COMMENT-US recap: EUR/USD sheds post-CPI gains as risk appetite suffers

May 11 (Reuters) – The dollar index held steady on Wednesday after surrendering fleeting gains in the wake of above-forecast April CPI data, as the fall in annual inflation rates from the previous month focused markets on the possibility that the peak in U.S. price growth may have been passed nL2N2X315F.

Peak inflation would also mean markets had probably priced in the top of the Fed rate-hikes expected in coming months, a key development for those seeking the dollar’s hefty uptrend to either resume or retreat.

But hopes for such clarity were disappointed, with the dollar only marginally lower in post-London trading, with EUR/USD, USD/JPY and GBP/USD, stuck in recent consolidation ranges.

It might take a substantial deviation from forecasts for next Tuesday’s U.S. retail sales data to break the dollar out of consolidation ranges.

EUR/USD got early help from ECB President Christine Lagarde cementing expectations for rate hikes to start as soon as July nL5N2X32V5, but Euribor yields ended up lower on the session, allowing 2-year Bund-Treasury yield spreads to slide 8bp from Tuesday’s close and EUR/USD to shed its post-CPI report gains.

EUR/USD was about flat and posted its fourth consecutive lower daily high, though it held above May and April’s 1.0483/695 EBS trend lows.

Germany’s final April inflation reading at 7.4% came as Bundesbank President Joachim Nagel said nL2N2X30FN the bank expected the inflation rate in Germany to reach close to 7% in 2022.

Sterling fell 0.4%, also whipsawed by the post-CPI swings in Treasury yields and stocks, finding sellers at the 1.2400 high by Monday’s 1.2405 minor rebound high.

UK consumer despair amid a harrowing inflationary crunch has likely forced the BoE to take a more measured rate-hiking approach than the Fed into year-end nL5N2X157E.

Sterling clung to June 2020’s swing low support at 1.2252, with Brexit trade issues unsettled nL5N2X32GN.

USD/JPY fell 0.5% after a brief rebound with Treasury yields in the initial response to the mixed CPI data. Treasury yields retreated and stocks sank as the session wore on, weighing on Treasury-JGB yield spreads and sparking broader haven demand for the yen.

USD/JPY was below on-close pivot point support at 130.10 on EBS, a close below which would target last week’s 128.62 low.

USD/JPY flashed its first weekly uptrend-ending signal since embarking on its 14.5% rally off March’s lows. If new highs in Fed hike pricing aren’t made after Tuesday’s retail sales report, a broader correction is possible nL2N2X31OQ.

High-beta currencies were pushed about by Treasury yields swings but also stocks, which eroded earlier gains against the dollar and sent them tumbling against the haven yen.

Commodity prices were higher due to supply concerns and dollar strength.

Bitcoin and ether extended their slides amid derisking and the collapse in stablecoin TerraUSD nL2N2X30RZ.

For more click on FXBUZ

(Editing by Burton Frierson
Randolph Donney is a Reuters market analyst. The views expressed are his own.)

((Randolph.donney@thomsonreuters.com))

U.S. welcomes Marcos victory in Philippines -Blinken

WASHINGTON, May 11 (Reuters) – The United States welcomed Ferdinand Marcos Jr.’s presidential victory in the Philippines and looked forward to working with his administration, U.S. Secretary of State Antony Blinken said in a statement on Wednesday.

“Our special partnership is rooted in a long and deeply interwoven history, shared values and interests, and strong people-to-people ties,” Blinken said, citing the nation’s role in building a “resilient Indo-Pacific region.”

(Reporting by Brendan O’Brien; writing by Susan Heavey)

((sheavey@thomsonreuters.com; +1-202-898-8300;))

Bank of England interest rate could hit 4% or more, ex-policymakers warn

By David Milliken

LONDON, May 11 (Reuters) – The Bank of England will probably need to raise interest rates much more sharply than financial markets expect to get soaring inflation under control, former policymakers said on Wednesday.

The BoE’s Monetary Policy Committee (MPC) has raised its key interest rate four times since December to 1% – the highest level since 2009 – but still expects inflation to exceed 10% by the end of this year.

“In my view the nominal interest rate – the short-term interest rate the MPC controls – will have to go up at least 250 to 300 basis points from here,” Adam Posen, who served on the MPC from 2009 to 2012, told the British parliament’s Treasury Committee.

That would mean an interest rate of 3.5% to 4% – well above the 2.5% peak priced in by financial markets for June 2023.

Posen, who is now the president of Washington’s Peterson Institute for International Economics, said unemployment needed to go higher – effectively requiring a recession – for inflation to fall back swiftly to the BoE’s 2% target.

Last month the International Monetary Fund forecast Britain would see weaker growth and higher inflation than any other major advanced economy next year.

While countries globally are suffering from soaring energy prices and supply chain bottlenecks, exacerbated by Russia’s invasion of Ukraine, Posen said the extra inflation in Britain appeared to be mostly due to Brexit.

The BoE’s own forecasts imply interest rates might rise less than markets expect, as it predicts inflation will significantly undershoot its 2% target in three years if interest rates follow the path expected by markets. Annual consumer price inflation in Britain hit 7.0% in March, the highest reading in 30 years.

Current MPC members typically do not talk directly about how high interest rates might go.

Massachusetts Institute of Technology professor Kristin Forbes, who served on the MPC from 2014 to 2017, told lawmakers she was concerned the BoE had not been clear enough about the scale of rate hikes that might come.

“Anyone who is buying a home or might have a variable interest rate on a credit card needs to be aware that rates could go up to the 3%-type level that Adam has mentioned,” she said.

Charles Goodhart, who served on the BoE’s first MPC after it gained independence in 1997 and has taught at the London School of Economics, speculated that rates might need to go even higher.

“It will take nominal interest rates well above 4% to actually start having a significant effect on the housing market, and my bet would be that we will go over 5%,” Goodhart told the parliamentary hearing into inflation and economic policy.

(Reporting by David Milliken
Editing by Paul Simao)

((david.milliken@thomsonreuters.com; +44 20 7513 4034;))

Chile’s central bank pushes back digital currency decision

SANTIAGO, May 11 – Chile’s central bank said on Wednesday that although a digital currency could improve payment systems and mitigate risks, a deeper cost and benefit analysis is required and it would publish a new report towards the end of the year.

The bank said in September it would decide on issuing a “digital peso” in early 2022, and created a high-level group to guide its medium-term strategy on means of payment. nL1N2QT2QL

In a report, the central bank said the currency (MDBC) “would allow the benefits associated with digital transformation to be enhanced, while mitigating some of its risks,” adding that the currency could help develop a more competitive, resilient and inclusive payment system.

“However, the report concludes that a final decision on this requires a more in-depth analysis of its costs and benefits, as well as a more complete comparison with other policy alternatives that address the same challenges,” it stated.

The report stressed that the digital currency plan must prevent negative impacts on the financial system and monetary policy. The bank will hold seminars with specialists and conduct workshops with public and private parties in the financial system.

The report also stated that “it is necessary to start working now on building capacities within the bank and moving forward in the development of specific projects that allow different designs to be tested.”

(Report by Fabián Andrés Cambero; Writing by Alexander Villegas; Editing by Richard Chang)

((fabian.cambero@thomsonreuters.com; twitter: @fab_reuters; +569 62479675;))

UPDATE 1-U.S. wants ASEAN leaders to play bigger role in Myanmar diplomacy – official

Adds details, quotes from U.S. official, background

WASHINGTON, May 11 (Reuters) – The United States wants Southeast Asian leaders to play a “more deeply engaged role” in efforts to put Myanmar back on a democratic track after a coup last year, the top U.S. official for Asia said on Wednesday ahead of President Joe Biden’s meeting with leaders from the region this week.

The Association of Southeast Asian Nations (ASEAN) has barred Myanmar’s junta from attending its summits until it sees progress in a five-point “consensus” agreed last year in hopes of ending violence that has erupted since the generals seized power and detained the country’s democratically elected leaders, including Nobel laureate Aung San Suu Kyi. nL2N2VQ08L

U.S Indo-Pacific coordinator Kurt Campbell, speaking at the U.S. Institute of Peace, said the Biden administration would “encourage greater diplomacy” on Myanmar in meetings with the leaders of ASEAN in Washington on Thursday and Friday. nL5N2X26Z1

“We hope and expect ASEAN to take real initiatives in terms of how to engage both the current government and the opposition about the way forward,” Campbell said.

Campbell said the 10-nation regional bloc had begun important initiatives on the crisis, including appointing an envoy to carry messages to the generals, but “most of those have not borne fruit.”

“The United States is going to continue its active role working with other partners, but we do want ASEAN to play a more deeply engaged role in the critical diplomacy about next steps in Burma,” he added, using the another name for Myanmar.

The February 2021 coup in Myanmar sparked nationwide protests, which were brutally suppressed by the military and led some to take up arms against the junta.

The bloodshed sparked unprecedented action by ASEAN, which normally hews to a policy of non-interference in its members’ affairs, to disinvite junta chief Min Aung Hlaing and other military officials from its summits.

Washington has said it would follow ASEAN’s lead on Myanmar’s participation in summits by only inviting a non-political representative from the country. nL1N2V600G

(Reporting by Simon Lewis, David Brunnstrom and Michael Martina; Editing by Mark Porter and Bill Berkrot)

((simon.lewis@thomsonreuters.com; +1 (202) 680-0055;))

UPDATE 1-South African rand firms slightly, tracking dollar moves

Updates rand to reflect afternoon trade, adds stocks

JOHANNESBURG, May 11 (Reuters) – The South African rand firmed slightly on Wednesday, tracking moves in the U.S. dollar which dipped against a basket of currencies.

At 1600 GMT, the rand ZAR=D3 traded at 16.0625 per dollar, around 0.3% stronger than its previous close and adding to gains from a day earlier. nL2N2X21K7

U.S. consumer inflation for April came in higher than expected in annual terms on Wednesday but lower than the March figure, causing the dollar to briefly turn positive on the day. But the dollar index =USD later fell to trade down roughly 0.2%. nL2N2X31E0

After the Federal Reserve raised its benchmark interest rate by 50 basis points last week, the largest hike in 22 years, investors have been attempting to assess how aggressive it will be in tightening monetary policy.

South Africa’s Reserve Bank has a rate-setting meeting next week and is also expected to tighten policy to try to tame inflation.

On the Johannesburg Stock Exchange, stocks closed firmer, led by technology companies linked to Chinese tech giant Tencent Holdings 0700.HK. Tencent was partly boosted by U.S. President Joe Biden saying he was considering eliminating Trump-era tariffs on China. nL2N2X21K4

Tech investors and market heavyweights Naspers NPNJn.J and Prosus PRXJn.J jumped 7.32% and 5.62% respectively. Naspers has a majority stake in Prosus, which in turn holds 28.9% in Tencent.

Overall, the Johannesburg All-Share index .JALSH rose 2.16% to 68,416 points while the Top-40 index .JTOPI climbed 2.36% to 61,786 points.

Commodity shares were also behind the higher close as the mining index .JMINI rose 1.65% on strong gold, silver and platinum prices. GOL/

(Reporting by Nqobile Dludla and Alexander Winning; Editing by Richard Chang)

((alexander.winning@tr.com))

Biden seeks to keep China in focus by welcoming ASEAN leaders

WASHINGTON, May 11 (Reuters) – President Joe Biden will host Southeast Asian leaders in Washington this week, seeking to show his administration remains focused on the Indo-Pacific and the long-term challenge of China despite the Ukraine crisis.

A two-day summit with the 10-nation Association of Southeast Asian Nations (ASEAN) begins with a White House dinner on Thursday before talks at the State Department on Friday.

It will be the first time leaders of ASEAN, created in some of the darkest days of the Cold War, gather as a group at the White House. President Barack Obama was the last US leader to host them, at Sunnylands in California in 2016.

Up to eight ASEAN leaders are expected. Myanmar’s leader has been excluded over a coup last year and the Philippines is in transition after an election.

The White House said discussions were under way with ASEAN about having an empty chair represent Myanmar at the summit to reflect dissatisfaction over the coup.

The ASEAN leaders, accompanied by US Secretary of Commerce Gina Raimondo and US Trade Representative Katherine Tai, will meet US business leaders on Thursday, the White House told reporters in a call.

The summit takes place ahead of Biden’s May 20-24 visit to South Korea and Japan, which includes a plan to meet fellow leaders of the Quad countries – Australia, India and Japan – who share US concerns about China’s ambitions to expand its influence in the region and globally.

Biden’s Indo-Pacific coordinator Kurt Campbell spoke at a think tank on Wednesday of a deep sense in the administration of the need not to be distracted from the Indo-Pacific, and said it would seek to increase US investment and engagement in ASEAN countries.

He said China, Myanmar, Taiwan and Ukraine would be among the issues discussed.

“We believe it’s critical for other countries to both publicly and privately underscore that what has taken place in Ukraine must never happen in Asia,” he said, referring to China’s threats to retake Taiwan by force if necessary.

Campbell acknowledged critiques that US engagement with ASEAN had waned in many important areas.

“We have to send a signal that the United States will be a steady partner, and that our strategic interests push us and point us into playing a larger role over time,” he said.

Campbell said on Monday there would be “substantial” discussions with ASEAN on technology, education, infrastructure, and that Washington would soon announce plans to better battle illegal fishing in the Pacific.

Kate Rebholz, acting US ambassador to ASEAN said the summit would bring “an ambitious and forward-looking US-ASEAN vision statement” and new initiatives, including partnerships in public health, climate and economic growth.

Even if the summit is largely symbolic and no dramatic advances are to be expected, analysts and diplomats said the fact it was taking place aimed to show that China remains a leading US long-term foreign policy challenge, regardless of Russia’s actions in Ukraine.

They said it would likely elevate the current US.-ASEAN “strategic partnership” by adding a word to make it a “comprehensive” strategic partnership, bringing it into line with the description of ASEAN’s ties with Australia and China.

“The meeting is the message … that the US is in fact capable of walking and chewing gum at the same time, and it’s not distracted,” Bilahari Kausikan, a former permanent secretary of Singapore’s foreign ministry, told the Stimson Center think tank on Monday.

US ‘FALLS FLAT’ ON ECONOMICS

ASEAN countries also share concerns about China and are broadly keen to boost ties with Washington, but they have been frustrated by a US delay in detailing plans for economic engagement since former President Donald Trump quit a regional trade pact in 2017.

At a virtual summit with ASEAN last October, Biden said Washington would start talks about developing a regional economic framework, but diplomats say this is likely to feature only peripherally this week.

Japan’s Washington ambassador said Biden’s Indo-Pacific Economic Framework (IPEF) is likely to be formally launched in Japan, but its details were still under discussion.

Analysts and diplomats say only two of the 10 ASEAN countries – Singapore and the Philippines – are expected to be among the initial group of states to sign up for the negotiations under IPEF, which does not currently offer the expanded market access Asian nations crave, given Biden’s concern for American jobs.

There has also been some frustration that ASEAN leaders will get little personal time with Biden, with no bilateral meetings announced, though the White House said Biden will have “private time” with each leader.

An adviser to Cambodian Prime Minister Hun Sen, in office since 1985 but making his first White House visit, told Reuters Biden should spend more time with leaders if serious about elevating ties.

(Reporting by David Brunnstrom, Simon Lewis, Trevor Hunnicut, Michael Martina and Steve Holland; Editing by Mary Milliken and Howard Goller)

Oil turns higher on looming EU ban on Russian oil

May 11 (Reuters) – Oil rebounded on Wednesday after plunging nearly 10% over the previous two sessions, buoyed by supply concerns as the European Union works on gaining support for a ban on Russian oil and as major producers warned they may struggle to fill the gap when demand improves.

Brent crude was up USD 2.35, or 2.41%, to USD 104.84 a barrel at 0658 GMT, while U.S. West Texas Intermediate crude climbed USD 2.2, or 2.24%, to USD 101.97 a barrel.

Oil prices have slumped with commodities and share markets this week, on worries about the hit to economic activity from prolonged COVID curbs in China and sharp interest rate hikes in the United States.

However the supply side still faces challenges.

The EU has proposed an embargo on Russian oil, but a vote, which needs unanimous support, has been delayed as Hungary has dug in its heels in opposition and other European nations have voiced concerns that their economies could suffer.

The impact of the embargo could be limited if the ban is watered down to ease the concerns of eastern European members, but analysts said oil prices could still rise.

“Even if we do see some of the measures relaxed, it is likely that EU sanctions will still meaningfully reduce EU imports of Russian oil and refined products,” Commonwealth Bank analyst Vivek Dhar said in a note.

Highlighting supply concerns, United Arab Emirates energy minister Suhail al-Mazrouei warned on Tuesday that when fuel demand recovers from the coronavirus pandemic, the Organization of the Petroleum Exporting Countries and its allies, together called OPEC+, may not be able to meet demand without further investment.

His comments followed Saudi Arabian Energy Minister Prince Abdulaziz bin Salman’s remarks that the world needs to pay attention not just to tight crude supply but energy capacity running short more broadly.

Capping market gains, the dollar held near a two-decade high ahead of a reading on inflation, due at 1230 GMT, which could hint at the outlook for Fed policy, making crude more expensive for buyers using other currencies.

China’s factory-gate inflation eased to a one-year low in April as state-driven production efforts supported supply and COVID-19 lockdowns in key industries cooled demand. But it could give policymakers headroom for more stimulus to shore up a flagging economy.

(Reporting by Laura Sanicola in New York, Sonali Paul in Melbourne and Muyu Xu in Beijing; editing by Simon Cameron-Moore and Jason Neely)

Gold recovers as dollar, yields dip

May 11 (Reuters) – Gold prices clawed back from a three-month low on Wednesday as the dollar and Treasury yields weakened, ahead of key U.S. monthly inflation data that could influence the Federal Reserve’s monetary policy stance and impact demand for bullion.

Spot gold was up 0.6% at USD 1,849.245 per ounce, as of 0729 GMT, after hitting its lowest since Feb. 11 earlier in the session. U.S. gold futures GCv1 firmed 0.2% to USD 1,846.40.

Benchmark U.S. 10-year Treasury yields were down for a third straight session, lifting demand for zero-yield gold.

The dollar =USD eased, albeit at elevated levels, making greenback-priced bullion more attractive for overseas buyers.

Analysts expect a sharp pullback in monthly growth of the U.S. consumer price index (CPI) for April, due at 1230 GMT, cooling to 0.2% from 1.2% in the prior month, and an annual increase of 8.1%.

U.S. central bank officials fortified on Tuesday their arguments for the swiftest series of interest rate hikes since at least the 1990s to combat inflation.

Gold is sitting at critical price support around USD 1,830 and if inflation is softer than expected, prices might bounce, with investors prioritising the data’s impact on the Fed instead of bullion’s role as a hedge, said Ilya Spivak, a currency strategist at DailyFX.

If inflation is in line or even slightly hotter, which is the main risk, gold might break lower through USD 1,800 and possibly head towards the next big test at USD 1,680, Spivak added.

Rising short-term U.S. interest rates lift the opportunity cost of holding bullion.

“The problem for gold investors and other commodities that have been used as an inflation hedge is that the Fed will at all costs raise rates to snuff out the inflation fires,” said Stephen Innes, managing partner at SPI Asset Management.

Spot silver gained 1.6% to USD 21.59 per ounce, platinum rose 1.8% to USD 981.40, and palladium increased 0.8% to USD 2,082.46.

(Reporting by Bharat Govind Gautam in Bengaluru; Editing by Sherry Jacob-Phillips)

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