Dollar hovers near 10-week lows as inflation expectations skyrocket
The dollar languished at around 2-1/2 month lows on Monday as investors bet that rising inflation would erode the currency’s value as the U.S. Federal Reserve maintains its loose monetary policy.
The five-year breakeven inflation rate - which measures expectations of inflation five years out - reached its highest since April 2011 on Monday. The 10-year breakeven inflation rate - a measure of expectations of inflation in 10 years time - rose to its highest since March 2013.
The yield on 10-year Treasury notes was up 2.3 basis points at 1.602%.
In recent years, rising inflation expectations have helped the dollar because investors have assumed interest rates would be raised in response to higher prices.
The dollar index, which measures the greenback against six rivals, was last at 90.205, up 0.06% on the day, having earlier hit its lowest since Feb. 25.
The market this week will be focused on U.S. consumer price data reported Wednesday as well as retail sales on Friday. Wednesday’s CPI data will show the state of inflation today, and while that may have some effect on the market, the higher breakeven rates seen Monday reflect broader bets that inflation will rise in the next several years.
“The Fed will let inflation run hot into 2023. I would be so shocked if the Fed hiked interest rates in 2022,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets.
The British pound was the biggest gainer among the G10 currencies, rallying as high as $1.416, the highest since Feb. 25. It was last up 1.02% at $1.413. This was despite Scotland’s leader saying that another referendum on independence is inevitable after her party’s resounding election victory.
Reference: Reuters
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