US Dollar Index Slides as Inflation Eases Fed Rate Hike Bets
The dollar index (DXY) fell more than 0.5% to around 100.7 on Tuesday after softer-than-expected US inflation reduced expectations of Federal Reserve rate hikes.
Consumer price data came in lower than expected, prompting traders to pull back bets on Federal Reserve rate hikes, sending U.S. Treasury prices soaring.
The yield on the 2-Year US Treasury, which is highly sensitive to the Fed’s short-term monetary policy outlook, fell as much as 14 basis points to 4.14%, its biggest daily drop since February.
Annual consumer inflation slowed to 3.5% in June from 4.2% in May, below forecasts of 3.8%, as lower energy prices helped ease overall price pressures.
Core inflation also moderated to 2.6%, while monthly consumer prices fell 0.4%, marking the first monthly decline since 2020.
The data offset recent hawkish remarks from Federal Reserve Chair Kevin Warsh, who reiterated the central bank’s commitment to restoring price stability and stressed that policymakers have no tolerance for persistently elevated inflation.
Meanwhile, renewed geopolitical tensions limited the dollar’s decline after the interim US-Iran peace agreement unravelled.
The US resumed strikes on Iran and reinstated a naval blockade, while Tehran launched fresh attacks on shipping in the Strait of Hormuz, reviving concerns over global energy supplies.
The report showed that falling gasoline prices in June offered some relief to consumers as the worst of the energy price shock from the Iran war began to fade.
Fed officials may welcome the data ahead of the Fed’s meeting later this month; however, renewed hostilities between the US and Iran have driven oil prices higher, potentially prolonging the conflict’s inflationary impact.
