Dollar struggles as softer inflation dims Fed hike bets

HONG KONG: The dollar extended its weakness on Wednesday after tumbling from ​a two-week high, as softer-than-expected inflation data curbed bets on a near-term Federal Reserve rate ‌hike, despite concerns that elevated oil prices could fuel inflation risks.

Against the yen , the dollar fetched 162.08, down 0.1%.

The euro and the British pound each gained 0.1%, trading at $1.1433 and $1.3401, respectively.

The New Zealand dollar was also well bid at $0.5819, hovering around its strongest level in ​a month, and the Australian dollar was steady at $0.6983.

The U.S. dollar index , which measures the currency against a ​basket of six peers, was a shade weaker at 100.81. It fell 0.35% in ⁠the previous session for its biggest pullback in nearly two weeks, which dragged the index down from the highest level since ​July 2.

U.S. consumer inflation slowed more than expected to 3.5% on a year-over-year basis in June. The headline consumer price ​index fell 0.4% over the month, the first decline since April 2020, as energy prices retreated.

Bond yields fell after the surprisingly soft data dampened market expectations for a near-term rate hike from the Federal Reserve, with yields on two year U.S. Treasuries ​off 9 basis points from a 16-month high.

“The sizeable downside surprise gives the Fed greater scope to ​remain on hold for longer,” said Sim Moh Siong, FX strategist at OCBC, noting the central bank officials had signalled its ‌July ⁠decision would hinge on the June inflation reading.

“While we continue to expect modest USD appreciation by year-end, near-term upside momentum may remain constrained in the absence of fresh catalysts,” he added.

Traders now expect that the Fed will skip a July rate hike as inflation cools. Chances of a July hike were halved to 16% after the inflation reports based ​on Fed funds futures ​prices as traded at ⁠the CME Group.

However the optimism was somewhat overshadowed by Fed Chair Kevin Warsh, who said during his testimony before the House Financial Services Committee that the central bank ​has “no tolerance” for persistently elevated inflation, and vowed to “do my job” if challenged by U.S. President ​Donald Trump.

In ⁠the Gulf, the latest escalation in hostilities in the Iran conflict pushed oil prices back to one-month highs, keeping inflation risks alive.

Trump on Tuesday reimposed a naval blockade of all Iranian ports, while the U.S. military said they have begun a fresh round of strikes “to continue ⁠degrading Iranian ​capabilities used to attack commercial shipping in the Strait of Hormuz.”

“One ​month of softer-than-expected CPI data will not close the door to interest rate hikes,” CBA economists Samara Hammoud said in a note, ​adding that the markets are closly watching the producer prices data due later today.