Greenback drops, yen surges as US consumer prices fall in June
THE greenback dropped on Thursday (Jul 11) after data showed that headline US consumer prices unexpectedly fell in June, with the Japanese yen at one point gaining more than 2 per cent as traders priced in the likelihood that the Federal Reserve will begin cutting interest rates in September.
The sharp gain in the yen increased speculation that the Bank of Japan may be intervening to shore up the currency, which fell to a 38-year low against the greenback last week.
But analysts said the move was most likely related to repositioning, with many traders being caught on the wrong side of the market.
“I’d say most likely it’s position squaring rather than any official moves,” said Steve Englander, head of global G10 FX research and North American macro strategy at Standard Chartered Bank New York branch in New York.
Thursday’s data showed the US consumer price index dipped 0.1 per cent last month after being unchanged in May, and posted an annual gain of 3 per cent, the smallest in a year. Core prices rose by rose 0.1 per cent in June, for an annual gain of 3.3 per cent.
The yen has suffered from a wide interest rate differential with the US and positions betting on further losses in the Japanese currency versus the dollar “have piled up”, Englander said. But today’s CPI data indicates that a September rate cut is “highly probable”, and so “that rate differential story erodes”, he said.
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Traders are now pricing in a 91 per cent probability of a rate cut in September, up from 75 per cent on Wednesday, according to the CME Group’s FedWatch Tool. A second cut is also likely by December.
The dollar index was last down 0.66 per cent at 104.28 and got as low as 104.07, the lowest since Jun 7.
Against the yen, the dollar fell 1.95 per cent to 158.49 and got as low as 157.4, the weakest since Jun 17.
The euro gained 0.45 per cent to US$1.088 and reached US$1.090, the highest since Jun 7. REUTERS
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