Dollar extends declines as traders pull back rate hike bets

NEW YORK: The dollar extended its losses against other major currencies on Thursday, a day after a report showed US inflation was not as hot as anticipated in July, prompting traders to dial back expectations for rate hikes by the Federal Reserve going forward.

Investors slashed bets on the possibility that the Fed will raise interest rates by 75 basis points for a third consecutive time when it meets in September after data on Wednesday showed US consumer prices were unchanged in July.

Fed funds futures traders are now pricing in a 66% chance of a 50 basis-point hike and a 34% chance of a 75 basis-point increase in September.

That sent stock markets higher and the dollar broadly lower as traders readjusted their forecasts to factor in the chance that decades-high inflation may have peaked.

The dollar index was down 0.257% at 104.95 at 10:45 a.m. EDT (1445 GMT), after recording its biggest daily fall in five months, of 1%, the previous day.

The greenback’s intraday drop was even larger, but it clawed back some of its losses after Fed officials attempted to temper expectations of significantly looser policy, with Neel Kashkari telling a conference on Wednesday that the central bank was “far, far away from declaring victory” on inflation.

Data on Thursday showed that US producer prices unexpectedly fell in July amid a drop in the cost for energy products and that underlying producer inflation appears to be on a downward trend, while jobless claims rose for a second straight week in a labor market that remains tight.

The euro and Japanese yen were among the currencies to benefit from the dollar’s weakness and both added to the previous day’s gains.

The euro was last up 0.34% at $1.03345.

The yen gained 0.22% to 132.59 yen per dollar after a rise of more than 1% on Wednesday.

The reason for the yen’s strength is that the Bank of Japan has interest rates on hold indefinitely, said Marshall Gittler, head of investment research at BDSwiss Holding Ltd.