The dollar hit a two-month low against a basket of currencies on Wednesday after data showed U.S. consumer prices surged in December, but the data did not give any new impetus to the Fed's policy normalization efforts. All G-10 currencies were higher against the dollar, led by the commodity currency Norwegian krone on the back of higher oil prices. Stocks rose, while the benchmark 10-year U.S. Treasury yield edged lower.

The dollar index fell 0.64% to 95.00, after falling as low as 94.90 during the session, its lowest since Nov. 11. U.S. consumer prices rose strongly in December, the biggest annual gain in nearly 40 years, reinforcing expectations the Federal Reserve will start raising interest rates as early as March. Joe Manimbo, senior market analyst at Western Union Business Solutions, said the U.S. economy appears ready for a rate hike starting in March. The problem for the dollar, though, is that the market already has highly hawkish expectations for Fed policy this year. So while today's CPI reading is high, it just reinforces what's already priced in about the dollar and Fed policy.

Federal Reserve Chairman Jerome Powell on Tuesday did not make clear the central bank's eagerness to accelerate its plans to tighten monetary policy, putting some downward pressure on the dollar, which has benefited from expectations of higher U.S. interest rates in recent weeks. Simon Harvey, senior foreign exchange market analyst at Monex Europe, said: "This is just one example of how the market is getting too ahead of the curve on Fed normalization right now; I think we need to see the inflationary impact of Omicron really kick in and push the Fed to raise rates four times this year." times, and began to quantify tightening. While we don't think today's CPI readings will affect a possible rate hike by the Fed in March, continued reports of lower inflationary pressures could lead the market to lower expectations for the normalization cycle throughout 2022, which will undoubtedly lead to continued dollar declines.

EUR/USD rose 0.66% to 1.1442, its highest since Nov. 15 last year; it was too early to expect sustained gains in the euro, wrote TD Securities Mazen Issa. The euro fell as much as 0.6 percent against the Swiss franc, its biggest drop since Nov. 26.

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