Dollar Trades Flat, Euro Drops As Market Digests U.S. CPI Data

The dollar traded flat and the euro weakened on Friday after a higher-than-expected Thursday readout of U.S. consumer prices that amped up investor expectations of interest rate hikes.

Comments from St. Louis Federal Reserve President James Bullard on Thursday unleashed a wave of bets on aggressive rate increases after the Labor Department said that in the 12 months through January, the CPI jumped 7.5% - the biggest year-on-year increase since February 1982.

Bullard told Bloomberg he'd like to see 100 basis points of hikes by July, adding that he had become "dramatically" more hawkish.

That shot the dollar into choppy trading early Friday as the greenback initially posted gains as well as an eight-day high, but struggled to choose a direction and eventually traded lower.

Meanwhile the euro, which surged last week, was set for a weekly decline after European Central Bank President Christine Lagarde said in an interview that raising rates now would not bring down record euro zone inflation but only hurt the economy.

The dollar index fell 0.095%, with the euro down 0.23% to $1.1401.

The greenback is likely to have a "choppy few months" until the market gets more certainty as to how the Fed's balance sheet runoff will commence, according to Edward Moya, senior market analyst at OANDA.

"You're going to see that dollar strength is primarily going to be driven on risk aversion and flows to safety, and right now, I think the market is really going back and forth as far as what Fed officials are really likely to do," he said.

Lagarde's comments along with Bullard's remarks on possible rate hikes "seem to be behind the complete reversal of yesterday's EUR/USD rally", said Chris Turner, global head of markets at ING.

"If the Fed is to step hard on the monetary brakes, we would certainly favour the dollar against the low yielders backed by central bankers who have firmly placed themselves in the dovish camp."

Goldman Sachs now expects seven 25-bps interest rate rises from the Fed this year, up from its previous forecast of five.

Fed policymakers had already flagged that they will begin raising the central bank's benchmark overnight interest rate from near zero at the March meeting, just days after they stop their two-year spree of buying billions in government bonds each month.

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