By Gertrude Chavez-Dreyfuss and Stefano Rebaudo
NEW YORK/MILAN (Reuters) – The U.S. dollar edged higher on Friday after data showed producer prices in the world’s largest economy came in higher than expected, affirming expectations the Federal Reserve will hold off the start of its interest rate-cutting cycle to the middle of the year, or even later.
The U.S. currency’s gains were higher following the producer price index (PPI) data, but have since come off ahead of a long holiday weekend.
Tuesday’s report showed the PPI gained 0.3% in January, up from forecasts of a 0.1% rise. On a year-on-year basis, the PPI increased 0.9%, compared with expectations of a 0.6% rise.
The PPI data followed a stronger-than-expected consumer price index (CPI) as well last month, suggesting the Fed would be in no rush to cut rates.
The dollar index, a gauge of the greenback’s value against six major currencies, was on track for a fifth straight week of gains. It was last up 0.1% at 104.32. On the week, the index rose 0.2%.
“Year to date, the dollar has been stronger. But if you consider the strong jobs, inflation, and GDP (gross domestic product) numbers, you could make the argument that the U.S. dollar should be way higher than it is,” said Eugene Epstein, head of structuring for North America at Moneycorp in New Jersey.
“I just see sideways trading or a slow grind higher for the dollar as a more likely scenario,” he added.
Fed funds futures have priced in no rate cut in March and a 74% chance of easing at the June meeting, according to LSEG’s rate probability app. That was more than 80% on Thursday.
Two weeks ago, markets had expected the first rate cut to happen in May. Futures are also pricing in about three rate cuts of 25 basis points each this year, down from about five cuts two weeks earlier.
Against the yen, the dollar rose 0.2% to 150.22 yen. The currency pair has touched 150 the last few days, putting the market on high alert to possible Japan intervention to weaken the yen.
The Japanese currency, which is highly sensitive to U.S. rates, was down 6% against the dollar this year as investors pare back their expectations of rate cuts from the Fed.
Finance Minister Shunichi Suzuki said that while a weak yen has merits and demerits, he was “more concerned” about the negative aspects of a weak currency.
A separate report showed that U.S. single-family homebuilding dropped in January, likely due to harsh weather, but a rise in permits for future construction suggested a rebound is likely in the coming months.
Single-family housing starts, which account for the bulk of homebuilding, dropped 4.7% to a seasonally adjusted annual rate of 1.004 million units last month.
“With the Fed likely cutting rates by the end of the year and demand resilient, the housing activity should stay supported,” Citi’s U.S. economics team wrote in a research note.
The U.S. consumer sentiment survey was also released on Friday, but the currency market showed little reaction.
U.S. consumer sentiment was little changed in February while one-year inflation expectations inched up.
The University of Michigan’s preliminary reading on the overall index of consumer sentiment came in at 79.6 this month, compared with 79.0 in January. Economists polled by Reuters had forecast a preliminary reading of 80.0.
The survey’s reading of one-year inflation expectations edged up to 3.0% this month from 2.9% in January.
The euro was flat at $1.0771.
(Reporting by Gertrude Chavez-Dreyfuss in New York and Stefano Rebaudo; Editing by Alison Williams and Jonathan Oatis)
