(Investing.com) – The dollar was up on Friday morning in Asia, hitting a new five-year high on the yen after a U.S. inflation report showed the largest annual increase in 40 years.
The euro struggled to hold its own, with a surprisingly hawkish turn from the European Central Bank (ECB) offset by growth risks from the Russian invasion of Ukraine.
The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched up 0.02% to 98.520 by 10:43 PM ET (3:43 AM GMT).
The USD/JPY pair was up 0.29% to 116.47, with the dollar gaining 1.3% on the yen this week.
The AUD/USD pair was down 0.23% to 0.7340 and the NZD/USD pair edged down 0.15% to 0.6852. New Zealand’s Business NZ purchasing managers' index was 53.6 in February.
The USD/CNY pair inched up 0.05% to 6.3248 and the GBP/USD pair inched up 0.04% to 1.3089.
The U.S. report, released on Thursday, showed that the consumer price index (CPI) grew 7.9% year-on-year and 0.8% month-on-month in February. The core CPI grew 0.5% month-on-month and 6.4% year-on-year.
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The CPI data "basically indicates that the U.S. Federal Reserve should be hiking rates this month, but it also indicates that they will keep going with interest rate hikes, at least initially," National Bank of Australia currency strategist Rodrigo Cantrill told Reuters.
The Fed and the Bank of Japan will both hand down policy decisions in the following week.
While the Fed is widely expected to hike interest rates, its Japanese counterpart is choosing to maintain a more dovish stance.
Both the pound and euro have felt the impact of the conflict in Ukraine and the resultant surge in commodity pieces.
The euro last traded at $1.1010, after a volatile Thursday that saw it finish 0.8% lower.
"The more hawkish message from the ECB had a temporary upward pressure on the euro but it was very short-lived which tells you that other dynamics are overriding any considerations about what the ECB might do, including news coming from Ukraine," said Cantrill.
He was referring to the ECB’s policy decision, handed down on Thursday, which kept the interest rate steady at 0% but said that the central bank will phase out its stimulus in the third quarter.
The decision also leaves the possibility of an interest rate hike before the end of 2022 open.
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The ECB also modestly downgraded its growth forecasts for both 2022 and 2023, while ramping up inflation expectations.
ECB President Christine Lagarde also called the conflict in Ukraine a "watershed for Europe" that would boost inflation but curb economic growth.
Meanwhile, talks between Ukrainian foreign minister Dmytro Kuleba and his Russian counterpart Sergey Lavrov on Thursday made disappointingly little progress towards ending the conflict.