NEW YORK: The dollar broadly weakened on Tuesday after softer-than-expected US inflation in June tempered expectations for US Federal Reserve policy tightening.
However, analysts said the relief may prove temporary with the US-Iran conflict pushing energy prices higher and keeping the prospects of an interest-rate hike alive later this year.
The dollar index was off 0.6 percent at 100.68 as Fed Chair Kevin Warsh began his first semiannual testimony to Congress.
“The softer-than-expected CPI print undercut the Fed’s recent hawkish leanings, sending the dollar lower as markets pared back Fed expectations,” said Uto Shinohara, senior investment strategist, at Mesirow Currency Management.
“The inflation data predates the latest rise in geopolitical tensions, higher oil prices, energy supply risks and Trump’s threat of a 20 percent protection fee, meaning the softer headline print does not yet capture these developments.” US and Iranian forces traded attacks in the Gulf, where maritime traffic through the Strait of Hormuz has come to a near-standstill, pushing oil towards USD90 a barrel. As a result, investors are now pricing in a higher chance of global interest rates rising this year. With uncertainty over how long the latest tit-for-tat exchanges might last and how they might affect the flow of oil to world markets, investors are focused on the outlook for price pressures. Warsh said recently that anyone expecting the Fed to go soft on inflation would be “disappointed,” although he stopped short of offering any guidance for what to expect in terms of monetary policy in coming months.
The odds of a July rate increase dropped to 12 percent from 42 percent yesterday, according to CME Fed Watch, although the odds of a rate hike for the year were more robust, recently at 80 percent, down from 89 percent on Monday.
Federal Reserve Governor Christopher Waller said on Monday rates may need to rise “in the near term” if data shows inflation remaining well above the central bank’s 2 percent target.“Fed governor Christopher Waller said yesterday, ‘sternly staring at inflation until it melts before our withering gaze is not an option,’ but that’s exactly what seems to be playing out,” said Karl Schamotta, chief market strategist, at Corpay.
“Without a sustained rise in global energy prices over the coming weeks and months, the US economy is now on a modestly-disinflationary trajectory that should keep US yields and the dollar capped.”
The euro rose 0.66 percent at USD1.1455, while sterling rose 0.53 percent to USD1.3417.
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