The U.S. dollar rose off a 2-1/2-month low versus major peers on Wednesday, as some traders bet that a hotter-than-expected inflation report could force the Federal Reserve to tighten monetary policy sooner than telegraphed.
Though the dollar index touched its weakest in more than two months against the euro overnight, it later rose to 90.77 as selling pressure persisted in stock markets following the Labor Department's report on consumer prices.
The government said inflation accelerated at its fastest pace in more than 12 years for April with the Consumer Price Index rising 4.2% from a year ago, compared to the Dow Jones estimate for a 3.6% increase.
Excluding volatile food and energy prices, the core CPI increased 3% from the same period in 2020 and 0.9% on a monthly basis. The respective estimates were 2.3% and 0.3%. The higher numbers might add pressure on the Fed to bring forward rate rises, a worry which has contributed to a selloff in rate-sensitive tech shares this week.
The yen rose 0.9% to 109.59 per dollar.
Commodity currencies cooled their heels near milestone peaks, with the Aussie and kiwi sliding 0.7% to sit just below recent ten-week tops, while the Canadian dollar was little changed just shy of Tuesday's almost four-year high. Sterling ticked lower to trade at $1.406.
"As long as the equity market doesn't experience a more drastic correction, the dollar is unlikely to get a safe-haven bid," said Rodrigo Catril, a senior currency strategist at National Australia Bank in Sydney.
"We know now that the Fed is very much firmly committed to easy policy," he said, a view reinforced by recent comments from Fed members that have made Dallas Fed President Robert Kaplan's mention of tapering support last month look like an outlier.
"Everybody else has come out firmly saying it's not the time...and that's a dollar negative story."
St. Louis Federal Reserve President James Bullard said on Tuesday he expects inflation could stay as high as 2.5% next year, while Fed Governor Lael Brainard said weak labor data last week shows the recovery has a long way to run.
"Remaining patient through the transitory surge associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals as some current tailwinds shift to headwinds is not curtailed by a premature tightening of financial conditions," she said.
Nominal U.S. yields crept higher with the focus on inflation, but real yields remain negative and under pressure.
The U.S. currency is also being weighed down by the improving global growth outlook, which tends to draw investors' cash to emerging markets, and by big and growing U.S. trade and current account deficits which also send dollars abroad.
The dollar index is "finding some risk aversion-related stability just above 90" amid the sell-off in equities, "but it's unlikely to morph into any meaningful upside," Westpac strategists wrote in a report.
"Fedspeak continues to underscore the patient pledge," while the "eurozone's rebound metrics continue to close the gap with the U.S.," keeping the dollar index heavy through the next several months, they said.
In the digital space, cryptocurrency ether rose about 4% to a record $4,358.38, bringing its gain this month to 56%.
That's as bigger rival bitcoin remains stuck below $60,000, nearly a month after setting an all-time peak at $64,895.22. It last traded around $57,471.20.