Dollar falls after cooling producer prices, Middle East escalation in focus
U.S. Dollar Weakens Amid Inflation Data and Geopolitical Tensions
By Laura Matthews
Producer Price Index Signals Easing Inflation
NEW YORK, July 15 (Reuters) - The dollar fell against major currencies on Wednesday after softer-than-expected U.S. producer prices reinforced signs of easing inflation, bolstering the view that the Federal Reserve can remain patient on interest rates even as investors weighed renewed strikes on Iran.
The Producer Price Index for final demand dropped 0.3% in June after a downwardly revised 0.6% increase in May, the Bureau of Labor Statistics said on Wednesday. Economists polled by Reuters had forecast the PPI unchanged after a previously reported 1.1% advance in May.
Currency Market Reactions
The dollar slipped 0.2% against the yen to 161.90 yen. The euro rose 0.51% to $1.1479, its highest since June 19. Sterling advanced 1.25% to $1.3554, its highest since mid-May, supported by news that Andy Burnham, likely to be named Labour party leader on Friday, will appoint a fiscally conservative finance minister.
The U.S. dollar index, which tracks the currency against six major peers, fell 0.55% to 100.36, its lowest since mid-June. It fell 0.4% in the previous session, its biggest decline in nearly two weeks, after touching its highest level since July 2.
Fed Policy Outlook
"The dollar's recent strength has largely been tied to expectations of tighter U.S. monetary policy," said Steve Kolano, chief investment officer at Integrated Partners.
"Not necessarily tighter policy itself, but rather a lower probability of policy easing, as Fed funds futures are still pointing to the possibility of one to two rate hikes by the end of the year."
Comments from Fed Officials
New York Fed President John Williams said inflation remains "unquestionably too high" but may have peaked and should begin easing, adding that monetary policy is well positioned to guide it back to target.
"This PPI report adds to the evidence that inflation momentum is cooling. Yesterday's CPI likely exaggerates the slowdown, but broader data suggest inflation may be past its peak," said Jeremy Schwartz, senior US economist
at Nomura. "The Fed will likely remain alert to inflation risks, but recent data support our expectation that policy will remain on hold."
Geopolitical Tensions: Middle East Escalation
Impact on Oil and Inflation
EYES ON THE MIDDLE EAST
The latest escalation in hostilities between the U.S. and Iran kept oil prices near one-month highs, maintaining pressure on the inflation outlook.
The U.S. military said it had begun a new wave of strikes on Iran at 6 a.m. ET (1000 GMT) on Wednesday, after U.S. President Donald Trump said on Tuesday that Washington had reimposed a naval blockade of all Iranian ports.
The dollar has tended to benefit during flare-ups in the conflict because of its safe-haven status and the relatively limited impact of higher energy prices on the U.S. economy compared with some peers.
Recent U.S. Inflation Data
Cooler U.S. inflation had earlier weighed on the dollar. U.S. consumer inflation slowed more than expected to 3.5% on a year-on-year basis in June, data showed on Tuesday.
The headline consumer price index fell 0.4% month-on-month, its first decline since April 2020, as energy prices retreated.
"The shift has taken the air out of the recent USD rally, but the technicals haven't necessarily turned over just yet," said Michael Boutros, senior market analyst at StoneX in New York. "The recent escalation in the Iranian conflict has caused a resurgence in oil and continued elevated energy prices could dampen the material progress made on the inflation front."
Fed's Stance and Market Expectations
New Fed Chair Kevin Warsh told the House Financial Services Committee on Tuesday that the central bank has "no tolerance" for persistently elevated inflation, and pledged to "do my job" if challenged by Trump.
Traders are now pricing in about a 70% chance of a December rate hike, down from around 80% yesterday, while a move later this month is seen as highly unlikely, according to LSEG data.
Global Economic Developments
China's Slowing Growth
Elsewhere, China's economic growth slowed sharply to 4.3% in the second quarter, its weakest pace in more than three years. The yuan briefly firmed to a one-month high as the data reinforced expectations of further policy support.
Outlook for the Dollar
"I see limited follow-through to the dollar's post-CPI decline," said Elias Haddad, global head of markets strategy at Brown Brothers Harriman in London, adding that U.S. economic outperformance, the Fed's commitment to fight inflation and strong foreign demand for U.S. assets should keep the greenback supported.
(Reporting by Laura Matthews in New York; additional reporting by Samuel Indyk in London and Jiaxing Li. Editing by Colin Barr, Alexandra Hudson and Nick Zieminski)
