Dollar Index is heading for a fifth week of gains as producer prices accelerate

Dollar Index was able to reverse the losses it suffered over the past two days and was able to record gains of about 0.25% and attempt to regain the level of 104.5 points.

The dollar’s gains against major currencies today come with the stronger-than-expected acceleration in producer prices in the US last January, which led to Treasury bond yields approaching their highest levels in more than two months.

While the Dollar Index came under some pressure early today due to the acceleration at the highest pace in about two and a half years and the higher-than-expected increase in UK retail sales in January after the sharp contraction in December.

Today we witnessed a group of stronger than expected Producer Price Index (PPI) readings. Therefore, these inflation figures would reinforce fears that the inflation that will be transmitted to the consumer could remain high for a longer period than expected, which is what prompted the markets to almost abandon hope of a rate cut in March, in addition to a noticeable decrease in the possibility of this cut in May.

The expected probability that the Fed will cut interest rates in March by 25 basis points is now only 6.5%, down from 10% and more than 60% a month ago. While the probability of rate cuts by the same amount in May fell from 35% to 26%, according to the CME’s FedWatch Tool.

This disappointment over the imminent interest rate cut was reflected in the return of noticeable increases in bond yields, which contributed to this push for the dollar to close the week with gains. After the losses suffered by ten-year bond yields during the previous two days, today they are approaching the 4.330% level, which is slightly close to the highest levels since the beginning of last December.

However, the series of stubborn inflation data and accelerating economic activity hide behind some concerns about the impact of keeping interest rates very high for a longer period than expected. The gap between ten-year Treasury bond yields and their two-year counterpart widened to the highest level in more than a month, reaching more than 0.3690%.