US Dollar Holds Near a One-Month Low
The US dollar remained close to a one-month low on Thursday after softer inflation data reduced expectations for an immediate Federal Reserve interest rate hike.
However, escalating tensions in the Middle East continued to threaten the inflation outlook. The conflict has supported oil prices and raised concerns about higher energy costs.
Dollar Weakens Against the Yen and Euro
The dollar declined against the Japanese yen for a third consecutive trading session. The USD/JPY exchange rate slipped by 0.1% to around 162.08 yen.
Meanwhile, the euro gained 0.1% to reach approximately $1.1472. That marked its strongest level against the dollar in one month.
The British pound traded close to a two-month high at around $1.354.
Sterling received support from expectations that Britain’s incoming prime minister will appoint a finance minister committed to cautious fiscal policies.
Australian and New Zealand Dollars Edge Lower
The Australian and New Zealand dollars both weakened by approximately 0.1%.
The Australian dollar traded near $0.6995, while the New Zealand dollar stood at around $0.5842.
Both currencies remained sensitive to changes in global risk appetite, commodity prices, and expectations for US interest rates.
Dollar Index Heads for a Weekly Decline
The US Dollar Index, which measures the greenback against six major currencies, was little changed at approximately 100.47.
The index remained near its lowest level since June 18. It had lost around 0.8% over the previous two sessions and was heading toward a weekly decline.
Recent dollar weakness followed a sharp reversal in expectations for Federal Reserve policy.
US Producer Prices Record Sharp Decline
US producer prices unexpectedly fell in June, recording their biggest decline in 14 months.
The data provided further evidence that inflationary pressure was easing before the latest escalation in the Middle East.
The weaker producer-price figures followed softer-than-expected consumer inflation and slower job growth in June.
Together, these reports significantly reduced the likelihood of a Federal Reserve rate hike in July.
July Fed Rate-Hike Bets Fall Sharply
Financial markets reduced the estimated probability of a July interest rate increase to around 11%.
At the start of the week, traders had priced in a roughly 45% chance of a hike.
However, markets still see an approximately even chance that the Federal Reserve will raise rates by at least 25 basis points in September, according to futures pricing.
Dollar Decline Seen as a Market Correction
Bank of East Asia investment strategist Bosco Wu described the dollar’s recent weakness as a correction following its earlier gains.
He said investors had priced in a July rate increase too aggressively. That expectation now appears less realistic because inflation is cooling faster than markets previously anticipated.
Nevertheless, Wu argued that the broader monetary tightening outlook remains in place.
One month of softer economic data may not be enough to confirm a lasting slowdown in inflation. Middle East tensions could also prevent the dollar from falling much further.
Middle East Conflict Supports Oil Prices
The escalating conflict between the United States and Iran kept crude oil prices close to one-month highs.
Higher oil prices could increase transportation, manufacturing, and household energy costs. Therefore, a prolonged rally may place renewed upward pressure on inflation.
The United States reportedly targeted Iranian coastal defences and missile facilities after restoring a naval blockade around Iranian ports.
Iran responded by threatening additional restrictions on regional energy exports. Tehran also described the conflict as an existential struggle with the United States.
Brent Crude Extends Its Rally
Oil prices increased for a fourth consecutive session on Thursday.
Brent crude futures traded near $85.28 per barrel, close to their highest level in a month.
Persistent strength in oil prices could complicate the Federal Reserve’s policy outlook. While recent US inflation figures have been encouraging, renewed energy inflation may limit the central bank’s ability to remain patient for an extended period.
