NEW YORK: The US dollar slid against most major currencies after data showed underlying inflation in the world’s largest economy rose less than expected last month, suggesting the Federal Reserve could cut interest rates sooner than later.
It did trim losses after President Donald Trump said on Wednesday a US trade deal with China is done, with Beijing to supply magnets and rare earth minerals while the US will allow Chinese students in its colleges and universities. A White House official said the agreement allows the US to charge a 55% tariff on imported Chinese goods. This includes a 10% baseline “reciprocal” tariff, a 20% tariff for fentanyl trafficking and a 25% tariff reflecting pre-existing tariffs. China would charge a 10% tariff on US imports, the official said.
On the data front, the core consumer price index - a gauge of underlying inflation - rose just 0.1% in May after a 0.2% rise in April.
“Inflation in May was lower than anticipated, suggesting the tariffs aren’t having a large immediate impact because companies have been using existing inventories or slowly adjusting prices due to uncertain demand,” wrote Alexandra Wilson-Elizondo, global co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management in emailed comments.
“If inflation stays under control or the job market weakens, the Federal Reserve will likely consider cutting interest rates down the road. We expect the Fed to remain on hold at next week’s meeting, but we see a path to a rate cut later in the year,” Wilson-Elizondo said.
In midmorning trading, the dollar was flat against the yen at 144.91, after trading lower earlier in the session, while the euro rose 0.3% to $1.1461, paring some gains, as sentiment for the US currency improved.
Traders of short-term interest rate futures had priced in a 68% chance that the Fed would cut rates by a quarter of a percentage point by September, compared with 57% before the data.
“The worst-case scenario is probably behind us. There’s a little bit of face-saving for both sides. From the US point of view, the rare earth thing was a big deal,” said John Praveen, managing director, at investment firm Paleo Leon in Princeton.
“They got an agreement. The question is whether it will be implemented. The fact they have some kind of agreement is probably at least a relief for the market. ... The fact that things that things are de-escalating is the important point,” Praveen said.
Against the Swiss franc, the greenback was 0.3% lower at 0.8203 franc.
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