The Dollar rose sharply on Friday, posting its largest daily increase against the Euro in almost three years, after strong US consumer price data trimmed expectations for further interest rate cuts by the Federal Reserve. The Dollar rallied against major currencies for the third consecutive week, bolstered by a string of US economic reports showing higher-than-expected growth in consumer spending and higher inflation, though the data eased some concern that the credit crisis would drag the US economy into a recession.
US Consumer Price Inflation rose to 4.3% for the November (YoY), its highest level since June 2006, while the core rate excluding volatile food and energy prices rose to 2.3% for the year, limiting the Fed's ability to cut interest rates in 2008.
Since global credit market conditions worsened again in November, in a replay of the crisis that gripped investors in August, the dollar has staged a recovery. Hedge funds, corporate accounts, and institutional investors have all shifted their bets in favor of the Dollar and sold off the Euro since mid November.
However, liquidity is thin given the approaching year end, exaggerating price action and making it unclear whether the Dollar can sustain a recovery into the New Year, traders said. Strategists believe US investors will repatriate their profits from abroad and seek relative safety in the depth of domestic markets.
EurUsd fell 1.35% to 1.4430, the lowest since late October and largest daily fall since at least January 2005. AudUsd fell 1.98% to 0.8607 the lowest since late September. GbpUsd dropped 1.22% to 2.0176.
The Fed cut its benchmark federal funds rate by 25bp to 4.25% on Tuesday, and together with other major central banks unveiled the next day a plan to inject liquidity into medium term money markets to ease the global credit crunch. Dollar, Euro and Sterling London Interbank offered rates (Libor) all fell on Friday for the second straight day following Wednesday's coordinated central bank liquidity plan.