US Dollar suffers amidst inflation data and expectations

The US dollar is nearly in free fall. The primary reason is the sell-off in US bonds, which has not spared even short-term securities that typically serve as a safe haven. The anti-dollar sentiment is fuelled by the weak inflation data released over the past few days.

Consumer prices for March decreased by 0.1%, and the annual rate of inflation fell to 2.4%, compared to expectations of an increase of 0.1% and 2.5%, respectively. Friday's producer price figures were even more divergent from expectations. The overall price index dropped by 0.4% against an anticipated increase of 0.2%. Annual inflation slowed from 3.2% to 2.7%, in contrast to average forecasts predicting an acceleration to 3.3%.

The slowdown in inflation formally removes the barrier to lowering interest rates. However, this is only feasible if one relies solely on firm past data. The situation becomes much more complicated when considering expectations.

Preliminary estimates from the University of Michigan revealed a disturbing rise in Americans' inflation expectations. The projected rate of price growth one year from now is estimated at 6.7%, and for five years, 4.4%. This represents an undeniable record for the one-year rate and is close to the peak for five-year expectations (4.6% in 1990). This is compounded by the sentiment index's drop to 50.8, the second-worst reading in history since 1978. The expectations index was also at historically low levels, being worse only briefly in 1980.