The dollar continued a strong rally after CPI inflation figures for the US, which came in above expectations. It confirmed that Federal Reserve hesitations to cut rates too aggressively because of price pressures. US CPI raised a 0.8 pct in November from October, core CPI also to the upside, with a 0.3 pct gain. The data reinforces the views that the US is entering a state of slowing growth with stubborn inflation pressures. Chinese yuan has been steadily appreciating, which helps the dollar appreciate against other currencies like the euro, while lower base metal prices will also keep a dollar-positive environment. As markets readjust their expectations, the dollar will benefit.
The dollar looks set to maintain its gains into year-end and we continue to look for the dollar to extend its recovery in 2008 as the extreme bearishness towards the US economy fades. Analysts have noted that the dollar may also be boosted from US companies repatriating foreign capital in order to make up for tight liquidity conditions.
Elsewhere, the pound was weaker after comments from the Bank of England's rate-setter Kate Barker, who said the UK economy is not moving back to a high inflation environment. The BoE is expected to cut interest rates again next year, which will weaken the pound further, particularly against the euro as the European Central Bank remains quite hawkish.That was confirmed once again today after the preliminary estimate for euro zone CPI was revised up to an annual 3.1 pct from 3.0 pct previously.