NEW YORK: The dollar slumped to its lowest since April 2022 on Thursday, as cooling US inflation bolstered expectations that the Federal Reserve would hike interest rates just one more time this year, eroding the greenback’s yield advantage over peers.
Against a basket of six major currencies, the dollar index fell 0.5% to 100, after dropping earlier to 99.968, a new 15-month trough. The dollar index was headed for its biggest weekly slide so far in 2023.
The euro rose 0.6% against the dollar to $1.1190, after hitting a new 16-month high earlier in the session. The euro headed for a sixth daily gain, its longest stretch of rises against the dollar this year.
Versus the Swiss franc, the dollar plunged to a fresh eight-year low of 0.8588 francs. It last changed hands at 0.8590 francs, down 0.9%.
US data on Thursday reinforced the view that inflation is moderating. US producer prices (PPI) inched up 0.1% in June, with the annual increase at 0.1% as well, the smallest year-on-year rise in nearly three years.
The PPI data followed Wednesday’s consumer prices index (CPI) report, which showed US core inflation slowed a lot faster than expected. It came in at 0.2% in June against market expectations for 0.3%, while headline annual CPI fell to 3%.
“It is clear that the trend in inflation is down. The question is how far the trend (will go),” said Ugo Lancioni, head of currency management and portfolio manager at Neuberger Berman in Milan.
“It reduces the probability that the Fed does more than what the market has priced in. And that has been taken by the market as dollar-negative.”
Interest rate futures showed markets have fully priced in another rate hike from the Federal Open Market Committee (FOMC) later this month, but expectations of any further increases have evaporated.
Whether or not the dollar is on a one-way trip lower over the rest of the year remains to be seen, according to City Index markets strategist Fiona Cincotta.
“A lot depends on what we hear from the FOMC in a couple of weeks - that will very much decide the fate of the US dollar and set the tone for the rest of the summer,” she said.
“If there is any hint of dovishness in the Fed, then the dollar bears are going to jump on that and it will be an excuse to continue grinding the dollar lower,” she said, adding she was not convinced the Fed would signal that July’s would be the final rate hike.
Against the yen, the dollar sank to a seven-week low of 138.06 yen, trading last at 138.31 yen, down 0.1%.
Data also showed an unexpected fall in US initial jobless claims by 12,000 to a seasonally-adjusted 237,000 for the week ended July 8. This was hardly talked about by market participants, given the focus on inflation, but does suggest that the labor market remains tight.
Sterling rose 0.8% to $1.3073, set for its sixth day of gains, having broken above $1.30 for the first time since April last year the previous day. The pound hit a fresh 15-month peak of $1.3110 earlier on Thursday.
Data on Thursday showed Britain’s economy shrank by less than expected in May, reinforcing the idea the Bank of England can afford to raise interest rates further without derailing growth.
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