US dollar slides as mixed US data highlights uncertain path
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THE US dollar dropped to a 3-week low in choppy trading on Friday (Jul 29), as investor concerns about recession outweighed inflation worries, for now, amid a mixed batch of economic data.
There was also a lot of month-end position-squaring, analysts said.
Earlier, US economic numbers showed that inflation continued its red-hot rise in June, keeping the Federal Reserve on track to raise interest rates as aggressively as it deems necessary.
The personal consumption expenditures (PCE) price index jumped 1 per cent last month, the largest increase since September 2005 and followed a 0.6 per cent gain in May. In the 12 months through June, the PCE price index advanced 6.8 per cent, the biggest gain since January 1982.
Excluding the volatile food and energy components, the PCE price index shot up 0.6 per cent after climbing 0.3 per cent in May.
The dollar initially rose on the inflation numbers, but gains fizzled amid the final University of Michigan report showing consumers’ inflation expectations slipped in July.
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Federal Reserve chairman Jerome Powell had mentioned the Michigan survey last month as key behind the pivot to the more aggressive rate posture.
The greenback was also partly weighed down by data showing the Chicago manufacturing index falling to a 23-month low of 52.1 from a prior low of 56.0, according to Action Economics.
In afternoon trading, the dollar index, a measure of its value against 6 major currencies, slid 0.3 per cent to 105.89. Earlier, it slid to a 3-week trough of 105.53.
“Traders are engaging in some quarter-end position-squaring, preparing for a period in which inflation and growth rates subside, tilting interest differentials against the dollar,” said Karl Schamotta, chief market strategist at payments company Corpay in Toronto.
“Next week’s (US) jobs report looms as a potential volatility catalyst, and no one wants to be caught offside if job creation slows more than expected,” Schamotta added.
Another key indicator, the US employment cost index (ECI), also increased. The ECI, the broadest measure of labour costs, rose 1.3 per cent last quarter after accelerating 1.4 per cent in the January to March period, the Labor Department said on Friday.
The index is widely viewed as one of the better gauges of labour market slack and a predictor of core inflation.
Action Economics, in its blog after the US data, said the ECI was one of the metrics that alarmed the Fed and caused its pivot to a 75 basis points hike.
Post-data on Friday, rates futures markets have priced in a 72 per cent chance of a 50 basis points hike at the Fed’s September policy meeting, with a 28 per cent probability of a 75-bps rate increase.
The rates markets also predict that the Fed funds rate will peak in February 2023. Pre-US data, futures were betting that top in the fed funds rate would hit this December.
The euro rose 0.2 per cent versus the dollar to US$1.0213.
Against the yen, the dollar slid 0.7 per cent to 133.42 yen. The greenback also posted its largest monthly percentage fall since July 2020.
The yen was the primary short bet of the widening interest rate differential trade between the United States and its global peers, with net shorts on the currency, despite a recent pullback, above historical averages at US$5.4 billion. REUTERS
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