The US dollar dropped sharply after a spike in US inflation was not strong enough to change the Federal Reserve’s already hawkish interest rate outlook.
The Australian dollar sealed its biggest daily increase since last August after commodity prices rallied and the US dollar dropped sharply on a spike in US inflation that averted more aggressive action from the already hawkish Federal Reserve., following a 6.8 per cent rise in November which pushed price growth to the highest in 40 years. Economists were expecting a 0.4 per cent monthly gain and 7 per cent for the 12-month measure.
The Australian dollar, considered a proxy for investor risk appetite, rose 1 per cent and touched a two-month peak of US72.92¢, settling at US72.85¢ in afternoon trading.P/ASX 200 Index rising 0.5 per cent higher as materials stocks advanced. The US dollar’s reaction was described as a “slightly unusual response to the on-consensus US CPI print of 7 per cent,” by ING. But the greenback has already factored in the path of US rates, and its depreciation is a vote of confidence in global growth as suggested by the rally in commodity prices.
CBA forecasts the US dollar to weaken this year because its countercyclical currency status means it will decrease as world growth recovers. As a safe haven, it does not necessarily move in strictly the same direction as the Fed’s interest rate trajectory. CBA expects the Australian dollar to reach US80¢ by the end of the year.“Short of another virus shock, we consider the Australian dollar is likely past its weak point in this cycle,” said Mr Capurso.