U.S. Dollar Tumbles As Inflation Cools

Data showing consumer price inflation in the U.S. dropping to the 3-percent level triggered a sell-off in the U.S. dollar, causing it to erase around 2 percent against major currencies during the week spanning July 10 – 14, 2023. The week, which had started in the backdrop of weaker-than-expected inflation readings from China ended on a strong disinflation note in the U.S. The positive inflation surprise was seen goading the Fed into a narrative and action that favors an extended pause.

The Dollar Index or DXY, a measure of the Dollar’s relative strength declined 2.3 percent between July 7 and July 14. From the closing level of 102.27 on July 7, the DXY tumbled and closed at 99.91 on July 14. The trading range during the week was wider, between a high of 102.56 and a low of 99.58. Waning rate hike bets dragged the DXY below 100 for the first time since April 2022.

Though markets still widely expect the Fed to raise rates by 25 basis points in the review in July, the expectations of a pause or pivot by the Fed down the line have firmed up post the recent update on inflation.

Data released on Wednesday had showed annual consumer price inflation falling to 3 percent in the month of June, versus 4 percent in the previous month and expectations of 3.1 percent. Core inflation that excludes the volatile food and fuel components too dropped more-than-expected to 4.8 percent from 5.3 percent earlier. Month-on-month inflation, which was seen rising from 0.1 percent to 0.3 percent, increased only to 0.2 percent. Core inflation, on a month-on-month basis, cooled to 0.2 percent from 0.4 percent earlier and expectations of 0.3 percent.

Continued indications of rate hikes by the ECB that contrasted with hints of an end to the Fed’s tightening cycle, lifted the euro against the U.S. dollar. The rise in inflation in Germany also supported the surge in the common currency. The EUR/USD currency pair rose to a high of 1.1245 on Friday, July 14, from the low of 1.0943 on Monday, July 10. The pair however closed a tad lower, at 1.1227, still rising 2.37 percent from the previous week’s close of 1.0967.

Strong earnings growth in the U.K. exacerbated the greenback’s tumble against the sterling, causing it to plunge close to 2 percent over the course of the week ended July 14. The Financial Stability Report that revealed the strength of the U.K. banking system also increased pressure on the Bank of England to continue to raise rates to combat inflation, lifting the British pound. The GBP/USD pair closed at 1.3086 on July 14, versus the close of 1.2836 recorded at the close of July 7. Like the euro, the pound too gained steadily over the course of the week, from the low of $1.2750 touched on Monday to the peak of $1.3146 scaled on Friday.

The Australian dollar gained 2.23 percent against the U.S. dollar in the week ended July 14, amidst the CPI-led retreat in the greenback. The AUD/USD pair which had touched a low of 0.6622 on Monday touched a high of 0.6896 on Friday, before correcting and closing at 0.6837. In the previous week the Aussie had closed at $0.6688. AUD also benefited from data showing a jump in the Westpac Consumer Confidence and NAB Business Confidence readings.

The Japanese yen gained 2.4 percent against the U.S. dollar as the hopes of a Fed pivot narrowed the monetary policy divergence between the Federal Reserve and the ultra-dovish Bank of Japan. Amidst the easing in U.S. treasury yields, the USD/JPY pair plunged to 138.73, from the level of 142.07 a week earlier. The pair’s weekly trading range was between the high of 143.01 and the low of 137.24.

On the horizon are the Fed’s interest rate decision on July 26, and the reviews by the ECB and Bank of Japan on July 27. The Bank of England’s review is due on August 3.

The Dollar index is still languishing at 99.98. The EUR/USD pair has edged lower to 1.1220 whereas the GBP/USD pair has eased to 1.3081. The AUD/USD pair is hovering near 0.6809. The USD/JPY pair has increased to 139.06.

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