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Why Gradual Rate Hike Possibility Hurt the US Dollar

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US dollar lower after inflation report

The US dollar depreciated against its major trading partner currencies after the US inflation (TIP) report was released on Tuesday. The US Bureau of Labor Statistics reported on Tuesday that consumer prices in the US grew by 0.2% in February after a stellar increase of 0.5% in January. Core CPI, which excludes volatile food and energy prices, was reported to have increased 0.2%, taking the year-over-year increase in core CPI to 1.8%, unchanged from the January reading. The US dollar (UUP) declined after this report, as a lower rate of inflation could limit the pace of rate hikes from the US Fed. For developed economies, higher interest rates could lead to a higher valued currency. The US Dollar (USDU) Index closed on Tuesday at 89.7, depreciating 0.19% as compared to the previous day’s close.

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Politics also had an impact on the US dollar

The US dollar (UDN) managed a minor recovery after the initial slump after the inflation (VTIP) report, but the recovery was short-lived as news about President Trump firing the US Secretary of State, Rex Tillerson, hit the wires. The decline in the US dollar due to key personnel exits from the White House could be temporary as markets are beginning to get used to President Trump firing key staff.

The outlook for the US dollar

With the risk of an increased pace of interest rates from the US Fed on the back burner, chances are the US dollar could depreciate further. The US FOMC meeting, which is slated to begin on March 20, would be one event where a hawkish Fed could save the US dollar from sliding further.

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