US dollar tumbles after inflation data upends rate outlook

THE US dollar tumbled to its lowest since last April on Thursday (Jul 13), heading for its biggest weekly slide so far this year, as traders took a surprisingly cool read of US inflation as a sign US rates could peak as early as this month.

US data on Wednesday showed inflation slowed a lot faster than expected last month. That gave rise to the biggest one-day US dollar sell-off in five months and left the greenback at its lowest in over a year against the euro and sterling, and at its lowest in over eight years against the Swiss franc.

US core inflation came in at 0.2 per cent in June against market expectations for 0.3 per cent, while headline annual CPI fell to 3 per cent.

Interest rate futures showed markets have fully priced in another rate hike from the Federal Open Market Committee (FOMC) later this month, but expectations of any further increases have evaporated.

Whether or not the US dollar is on a one-way trip lower over the rest of the year remains to be seen, according to City Index markets strategist Fiona Cincotta.

“A lot depends on what we hear from the FOMC in a couple of weeks – that will very much decide the fate of the US dollar and set the tone for the rest of the summer,” she said.

“If there is any hint of dovishness in the Fed, then the US dollar bears are going to jump on that and it will be an excuse to continue grinding the US dollar lower,” she said, adding she was not convinced the Fed would signal that July’s would be the final rate hike.

As traders priced in an end to US rate rises, the narrowing gap between US borrowing rates and those elsewhere drove other currencies, particularly the euro, sterling and the yen higher against the US dollar.

The euro headed for a sixth daily gain – its longest stretch of rises against the US dollar this year. It was last up 0.4 per cent at US$1.1173, having hit an earlier high of US$1.1175.

George Saravelos, Deutsche Bank global head of FX research, said in a note on Wednesday that, following the inflation data, the time had come to buy the euro.

“(Wednesday’s) US inflation print is the last piece of evidence we have been waiting for to recommend going long EUR/USD again. We target US$1.15 which is our year-end forecast, but as we have argued previously we see a US$1.15-1.20 range by the end of the year as entirely possible,” he said.

The euro hasn’t touched US$1.20 since mid-2021.

Sterling rose 0.6 per cent to US$1.3073, set for its sixth day of gains, having broken above US$1.30 for the first time since April last year the previous day.

Data on Thursday showed Britain’s economy shrank by less than expected in May, reinforcing the idea the Bank of England can afford to raise interest rates further without derailing growth.

“Today’s figures were better than expected, but I don’t think they’re enough to get the champagne out yet,” City Index’s Cincotta said.

The yen, which has gained 4 per cent in the last five days, held steady against the US dollar at 138.565, thanks in part to another drop in US Treasury yields, which the US dollar/yen currency pair tends to track closely.

The Swiss franc traded at its strongest level against the US dollar since the Swiss National Bank removed the peg on the domestic currency in early 2015, leaving the US dollar down 0.4 per cent on the day at 0.8634 per franc.

In Scandinavia, where inflation is looking sticky and central bankers are projecting further rate hikes, the Norwegian krone headed for its largest weekly gain versus the US dollar this year, up nearly 5 per cent at five-month highs, while the Swedish krona was set for a weekly gain of 4 per cent and traded around two-month highs.

“We think the recent US dollar underperformance reflects a qualitative shift in market comfort with being short US dollars as the terminal Fed policy rate looks increasingly capped,” said currency analyst Steve Englander at Standard Chartered. REUTERS