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US Dollar soars after record inflation data

US Dollar Index, index, US Dollar soars after record inflation data

Dollar rose sharply on Wednesday after the release of strong US inflation data.

The dollar index bounced back from late-February lows of around 90, which have already provided support several times this year.

Dollar has moved higher as inflation has revived speculation of a rate hike. The pace of price growth continued to gain momentum last month, contrary to expectations of stabilization. The overall price index rose 0.8% for April, against the expected 0.2% and 0.6% for March. Annual inflation accelerated to 4.2% from 2.6% a month earlier.

The monthly jump in core inflation of 0.92% in April was a record for the last 40 years. American statistics saw similar values only in the early 1980s, when the Fed was struggling with hyperinflation with a double-digit key rate.

It's easy to see that this acceleration goes well beyond the low base (associated with the pandemic). The driver was the price of used cars (+10%). The increase in this category accounted for a third of the growth in the CPI index.

The main reason for accelerating inflation is the boom in the stimulus-fueled American economy. After a trillion-dollar aid package from the Trump administration, the US authorities poured another $ 1.9 trillion into the system after the arrival of Biden, who is also preparing a $ 2.25 trillion infrastructure investment plan.

The "banquet" is paid for by the "printing press" of the US Federal Reserve, which increased the balance sheet by $ 3.16 trillion last year — and by another 417 billion in January-April. A tsunami of Dollar-denominated liquidity is driving commodity markets at a rate that exchanges haven't seen in decades.

More expensive raw materials force manufacturers to raise prices: a survey of small businesses conducted by the NFIB showed that 36% of entrepreneurs increase the cost of their products, which is a record since 1981.

Dollar and US government bond yields will rise if US inflation continues to accelerate. The April inflation data is unlikely to change the US Federal Reserve's view on the temporary nature of inflationary pressures.

The acceleration of inflation has revived speculation of an imminent tightening of monetary policy, causing increased traction in the dollar. Now it's up to the Fed. Signals from the FOMC that this report does not affect monetary policy will turn the markets 180 degrees, as investors will look for insurance against inflation in purchases of raw materials and foreign currencies.

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