Dollar retreats as US inflation data eases rate hike expectations
US inflation data impacts dollar and rate hike outlook
By Chuck Mikolajczak
Inflation and consumer spending trends
NEW YORK, June 25 (Reuters) - The dollar was set to snap a three-session streak of gains on Thursday, after a flurry of U.S. economic data that included a reading on inflation softened expectations for rate hikes from the Federal Reserve this year.
The Commerce Department said the personal consumption expenditures price index (PCE) surged 4.1% in the 12 months through May for the largest increase and the first reading above 4.0% since April 2023, but it matched expectations of economists polled by Reuters.
On a month-over-month basis, the PCE increased 0.4%, just below the 0.5% estimate.
Even with the elevated inflation, consumer spending was unfazed, rising 0.7% in May, up from 0.4% in April and above the 0.6% estimate.
Expert commentary on inflation outlook
"The worst of inflation and consumer angst may be mostly behind us," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.
"Inflation expectations are tied more to the price at the pump than the price of microchips and memory. As long as gasoline prices trend lower, inflation expectations will likely follow suit."
Dollar performance and market reactions
The dollar index, which measures the greenback against a basket of currencies, fell 0.19% to 101.41 and was on track for its biggest daily percentage drop in two weeks, with the euro up 0.16% at $1.1375.
The greenback had risen in the past three sessions and five of the prior six as expectations for rate hikes from the Fed this year had grown. It touched a 13-month peak on Wednesday.
Impact on commodities and cryptocurrencies
Recent dollar strength has helped to push gold briefly below $4,000 an ounce for the first time in just over seven months and bitcoin below $60,000 for the first time since early June.
Rate hike expectations
Markets are now pricing in a roughly 30% chance for a hike of at least 25 basis points at the central bank's July meeting, down from 34.2% in the prior session, according to CME FedWatch. For the September meeting, expectations for a hike dipped to 62.1% from 65.7% on Wednesday.
Fed commentary
Chicago Federal Reserve President Austan Goolsbee said there was a "glimmer of hope" on services inflation in the latest U.S. inflation report, but underlying inflation pressures are still too high and are trending the wrong way.
Other economic indicators
GDP and jobless claims
GDP REVISED UP, JOBLESS CLAIMS DROP
Other data from the Commerce Department showed gross domestic product increased at an upwardly revised 2.1% annualized rate in the first quarter, up from the previously reported 1.6% pace, while consumer spending growth was cut to a 0.5% rate from the prior 1.4%.
Data from the Labor Department showed weekly initial jobless claims fell by 12,000 to a seasonally adjusted 215,000, below the 225,000 forecast.
Currency movements and international developments
Sterling strengthened 0.25% to $1.3196, putting it on track to snap consecutive declines in the wake of the resignation of Prime Minister Keir Starmer on Monday.
Against the Japanese yen, the dollar strengthened 0.01% to 161.79. A break above 161.96 would leave the yen at its weakest level since 1986.
Bank of Japan and government policy
The Bank of Japan should raise interest rates once every few months and stand ready to speed up the pace of hikes, hawkish board member Naoki Tamura said, highlighting the bank's focus on inflationary risks from the Middle East conflict.
Japan's government will call for monetary policy that bolsters private demand, a draft of its long-term economic blueprint reviewed by Reuters showed, signaling a preference for keeping borrowing costs low and setting up potential policy tensions with the central bank.
Analysts at Societe Generale said they "believe markets should look through the announcement at this stage, although fiscal risks are being delayed rather than eliminated and are likely to become a more important theme over time."
(Reporting by Chuck Mikolajczak; Additional reporting by Amanda Cooper in London, Tom Westbrook in Singapore and Rocky Swift in Tokyo; Editing by Jacqueline Wong, Thomas Derpinghaus and Andrea Ricci)
