The dollar climbed to seven-week peaks on Friday, after data showed U.S. inflation accelerated while consumer spending rebounded last month, reinforcing expectations that the Federal Reserve may need to hike interest rates a few more times this year to curb the surge in prices.
Against the yen, the dollar hit a two-month high, while rising to its strongest level in seven weeks versus the Swiss franc following the data.
The personal consumption expenditures (PCE) price index, tracked by the Fed for monetary policy rose 0.6% last month after gaining 0.2% in December. In the 12 months through January, the PCE price index accelerated 5.4% after rising 5.3% in December.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 1.8% last month, according to the Commerce Department. Data for December was revised higher to show spending dipping 0.1% instead falling 0.2% as previously reported.
"The data was pretty strong all around and amazingly, there were positive revisions, as well. And so that's really saying something. For the dollar, it's in the driver's seat," said Mazen Issa, senior FX strategist at TD Securities in New York.
"I think (Fed Chair Jerome) Powell floated the mission accomplished banner way too soon this month, just ahead of the payrolls report. Certainly, it looks like his comments were poorly placed. And it looks like the markets have priced out any chance of a cut this year, which is a sizable shift given that barely four weeks ago, the market was looking at cuts in the second half of this year. That adjustment is a dollar-positive dynamic."
The dollar index last rose 0.6% to 105.23, after earlier hitting a seven-week high of 105.32.
The euro fell 0.45% against the greenback at $1.0547. Earlier in the session, it dropped to a seven-week low of $1.0536. Sterling was down 0.68% against the dollar at $1.1938.
The U.S. currency advanced to a two-month high versus the yen of 136.44 yen and last changed hands at 136.41 up 1.27%.
Strong U.S. jobs data and rhetoric from Federal Reserve officials this month about openness to higher rates if needed to bring down still-high inflation have helped the dollar to erase its year-to-date losses.
Money markets are now positioned for a peak in U.S. interest rates of 5.4% in July, and expect it to stay above 5% all year, compared with the current target rate of 4.5-4.75%. The markets have also priced in rate hikes over the next three meetings.
"Now that you're at a higher interest rate level, the nuancing and what that terminal rate is, is a little bit trickier to sort of triangulate. For FX markets, there's been a shift from being short dollars to this idea of, 'well, if we're not going for a hard landing or soft landing, is there a landing.' The market is going to be whipsawed over that," Issa said.
"At the end of the day, we're really learning that the U.S. economy is far more resilient than the market had anticipated. And in that environment, that perceived terminal rate that the market had and certainly the perceived terminal rate that is embedded in the Fed dot plot … may not be restrictive enough."