The dollar fell on Wednesday after data showed U.S. consumer prices rose less than expected in March, raising expectations that the Fed is likely to stop hiking rates after a possible increase in May.
The Consumer Price Index climbed 0.1% last month, below economists' expectations for a 0.2% gain, and down from a 0.4% increase in February. In the 12 months through March, the CPI increased 5.0%, the smallest year-on-year gain since May 2021. The CPI rose 6.0% on a year-on-year basis in February.
Excluding the volatile food and energy components, the CPI increased 0.4% last month after rising 0.5% in February. Sticky rents continued to drive core CPI.
"Headline inflation coming down more than expected is backing the view of the Fed being basically one more and done," said Joe Manimbo, senior market analyst at Convera in Washington, D.C.
"The market was just really cautious ahead of the data, as if it had been hotter than expected it might suggest that June might also be a live meeting. But I think with inflation taking a big step down from 6% to 5%, if that sustains, that could give the Fed leeway to cut rates later this year if we see a sharp slowdown in the economy," Manimbo added.
Economists at Goldman Sachs said after the data that they no longer expect the Fed to raise rates in June.
The dollar index fell 0.63% on the day to 101.56 and is down from around 102.11 before the data. The euro reached $1.10005, the highest since Feb. 2, and was last at $1.099 up 0.69% on the day. The dollar dipped to 133.21 Japanese yen, down 0.33% on the day, from around 133.85 before the data.
Fed funds futures traders are pricing in 71% probability that the Fed will raise rates by an additional 25 basis points at its May 2-3 meeting, down from around 76% before the data.
San Francisco Fed President Mary Daly on Wednesday said that while U.S. economic strength, labor market tightness, and too-high inflation suggest the Fed has "more work to do" on rate hikes, other factors including tighter credit conditions could argue for a pause.
Richmond Fed President Thomas Barkin, meanwhile, said that the U.S. central bank has more work to do in bringing inflation back down to its 2% target because the latest data on price pressures is not sufficiently weak.
Minutes from the Fed's March meeting released on Wednesday also showed that several Fed officials considered pausing interest rate increases until it was clear the failure of two regional banks would not cause wider financial stress, but even they ultimately concluded high inflation remained the priority.
Retail sales data on Friday will be analyzed next for how consumer spending is being affected by higher prices.