Dollar struggles after softer inflation blunts Fed hike bets

HONG KONG, July 15 (Reuters) – The dollar drooped 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 162.20, down 0.05%. The euro and the British pound both gained more than 0.1%, trading at $1.1438 and $1.3403, respectively.

The New Zealand dollar was also well bid at $0.5815, hovering around its strongest level in a month, and the Australian dollar was steady at $0.6984. 

The U.S. dollar index, which measures the currency against a basket of six peers, was a touch weaker at 100.8. It fell 0.35% in the previous session for its biggest pullback in nearly two weeks, which dragged it down from the highest levels 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 2-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 that central bank officials had signalled their 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, with the odds of one halved to 16% after the inflation reports based on Fed funds futures prices 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 economist Samara Hammoud said in a note, adding that markets are closely watching producer price data due later on Wednesday.

Elsewhere, China’s second-quarter economic growth slowed sharply to 4.3%, its lowest level in more than three years. The yuan briefly firmed to a one-month high as the data reinforced expectations for additional policy support measures.