Dollar falls sharply and interrupts series of weekly gains after US inflation data By Reuters

By Luana Maria Benedito

SÃO PAULO (Reuters) – The currency closed sharply lower against the real this Friday, interrupting a series of weekly gains, as US inflation data in line with expectations brought down Treasury yields.

The spot US currency closed down 0.94%, at 5.1168 reais on sale, marking the most intense daily devaluation in a week and the lowest closing level since April 11 (5.0908).

Compared to last Friday’s closing, the dollar fell 1.58%, interrupting a sequence of four consecutive strong weekly gains, a period in which it had risen around 4%. After sharp movements in the exchange rate, it is normal for there to be occasional adjustments in the opposite direction, as investors make profits.

The decline in the US currency in this session came in line with a decline in US bond rates, after data showed that inflation in the country increased moderately in March, in line with market expectations.

The PCE price index, the Fed’s favorite for monitoring inflation, rose 0.3% last month, the U.S. Commerce Department said on Friday. February data has not been revised and shows a 0.3% increase in PCE. In the 12 months to March, inflation increased 2.7%, after rising 2.5% in February.

Economists consulted by Reuters predicted that the index would rise 0.3% in the month and 2.6% on an annual basis.

“PCE inflation in March was strong, but not as bad as feared following the large positive surprise in the quarterly data,” Bank of America (NYSE:) said in a report to clients.

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The day before, stronger-than-expected PCE inflation data in the first quarter led many market participants to postpone bets on the timing of the Fed’s first easing until November or even December.

But, with this Friday’s relief, futures traders linked to the Fed’s base interest rate are once again pricing in a first reduction in September, according to data from LSEG.

This pricing, however, remains much more conservative than the prevailing forecast at the end of last year that the Fed would begin easing monetary policy as early as March.

“In reality, the PCE reading should only confirm the recalibration of expectations that occurred in April and now bets that the beginning of the interest rate cutting cycle will only happen at the end of the year and will probably be more timid”, said Danilo Igliori, economist -head of Nomad.

“They do nothing to generate extra confidence that inflation is indeed converging sustainably towards the 2% target.”

Higher interest rates in the US play in favor of the dollar, as they make US yields more attractive to foreign investors.

In Brazil, data from earlier showed that the IPCA-15 rose less than expected in April, with a drop in transport costs offsetting the weight of food prices, taking the 12-month rate to below 4%.